What is Buy Now Pay Later and how does it affect your ability to borrow?
BNPL stands for Buy Now Pay Later. Who would want to do that? Plenty of people so it seems. Depending on your age, you have either come to know this as normal or it still feels a little odd for the Gen X'ers and older who were brought up with Lay-By.
Layby means you pay instalments and get the item once it's paid off. BNPL means you get the item straight away then pay it off. Lay-by rules and rights don't apply to buy now pay later sales.
What is Buy Now Pay Later (BNPL) and who provides it?
BNPL is a type of short-term financing that allows consumers to make purchases and pay for them at a later date, usually in instalments. BNPL providers include:
- Afterpay
- Humm
- Zip Pay
- Klarna
- CBA StepPay
- and others
What about Pay Advance?
Pay Advance (aka Pay-on-demand) services allow users to receive part of their pay right away rather than waiting until payday, subject to interest and upfront and monthly fees.
Pay Advance providers include:
- Beforepay
- MyPayNow
- Wagetap
- CBA AdvancePay
- and others
Aussies who use BNPL are 43% more likely to also use Pay Advance services.(Research by Frollo)
BNPL use grew throughout 2022 as interest rates increased and Aussies looked to find solutions amid the rising cost of living. The average spend last year was $439 per month including repayments, fees and penalties.
Although Pay Advance services aren't as popular as BNPL, Pay Advance usage almost doubled in 2022. On average Pay Advance customers spent $1,331 per month on repayments, fees and penalties.
Simon Doherty from Frollo says " BNPL and Pay Advance are going to be part of the makeup of the consumer finance landscape for the foreseeable future.
A customer spending $500 per month on Pay Advance services might not be able to afford the same mortgage as someone who doesn’t. So it’s essential to get visibility over this spending to reduce risk and lend responsibly."
Impacts on Home Loan Affordability
Previously BNPL was in a grey zone and mostly went under the radar. However APRA (the regulator) have stepped in. As a result a number of lenders including ING and Macquarie have recently announced that they are now taking BNPL debts into account when assessing affordability for a new loan. These debts must be included in serviceability and DTI (debt to income ratio).
Lenders can't rely on your credit score to get the complete picture as most BNPL debts aren't registered. So as part of a home loan application you will need to declare your BNLP and Pay Advance debts. Many lender want to see your last 3 months account statements to verify living expenses so this will show up.
What can you do to improve your chances of home ownership?
Cancel and/ or reduce all other debts where possible. This includes credit cards, store cards, car loans and personal loans. If you have BNPL or Pay Advance consider stopping this at least while you are transitioning in home ownership. Once you buy a home you will have other priorities including a new mortgage.
All debts including credit cards are assessed by the LIMIT not what you currently OWE.
E.g. if you have a $15k Limit on your credit card, but only use and can manage with a $2k limit then reduce it now. It all helps!
As your Home Loan Advisor, we are here to guide you and ensure your application will be approved by a lender before we put the application up for assessment. We will discuss this in more detail with you if it applies.
If you have any questions on this topic or other home loan related enquires, please contact us via our Home Page.
