Afterpay is a popular buy now, pay later (BNPL) service in Australia that lets you buy what you need and pay for it in four equal instalments spread over six weeks. Unlike credit cards that typically charge interest on payment plans, Afterpay is free to use unless you miss a repayment.
Unsurprisingly, many people, especially youngsters, have started preferring BNPL services to credit cards to avoid paying annual fees and running into credit card debt. But how does Afterpay (or any other BNPL service) affect your ability to qualify for a home loan?
1. If you use Afterpay irresponsibly, it could hurt your credit score
When you apply for a home loan, one of the first things a lender will check is your credit score. Your credit score is a three-digit number that indicates your reliability as a borrower. Generally, lenders reserve their best rates and offers for borrowers with a high credit score because they are considered less likely to default on a loan. Borrowers with a less than perfect credit score either end up paying a higher rate of interest or may not qualify for a loan at all, depending on the lender’s policies.
Your credit score is affected by both positive and negative financial behaviours. So, paying your credit card bills on time can help you build your credit score and not making a payment on time will result in a lower score. Interestingly, using Afterpay cannot help you build your credit score. However, if you miss a repayment, Afterpay reserves the right to inform third parties like credit reporting bureaus about the default, and this could adversely impact your credit score and, in turn, your home loan application.
2. Afterpay loans can impact your mortgage serviceability and borrowing capacity
Apart from your credit score, lenders also consider your income and expenses while assessing your loan serviceability before approving your mortgage application. These expenses include everything from your Netflix subscription, the amount you generally spend on everyday items, and your credit card and other debt repayments.
Even though an Afterpay instalment is considered a typically small repayment amount (the maximum amount you can borrow with Afterpay is $1,500), if you regularly use Afterpay to pay for goods each month, lenders will most likely factor this into their assessment because it could impact your ability to repay the mortgage.
3. Using Afterpay regularly may give the impression that you cannot manage your money
When you apply for a home loan, a lender will most likely ask for your bank statements to assess how responsibly you spend your money.
When they scan through the statement, they can see your Afterpay expenses and may get the impression that you cannot manage your money if you use Afterpay to borrow money often or use more than one BNPL service. Lenders are likely to be even more concerned if you regularly fall behind on your repayments, which can be ascertained from the late fees levied on your repayments.
Does it help to close an Afterpay account before applying for a home loan?
The answer to that question depends on how you use the service and the number of ongoing debts on your file. Having an Afterpay account doesn’t impact your credit score directly. If you use the service smartly, it can help you manage your finances, especially during times when you are faced with an emergency expense. However, if you use Afterpay or any other BNPL service to borrow money regularly or purchase things you cannot afford, you run the risk of falling into a debt trap and your home loan application can be negatively affected.
One instance where it could help to close your Afterpay account is when you have several ongoing debts. As recurring payments are used by lenders to calculate your mortgage serviceability, eliminating your regular Afterpay debt can reduce your ongoing expenses and thus increase your mortgage serviceability.
