Does Buy Now Pay Later Affect Your Mortgage Application?

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A debt deferred is a non-existent debt in your current financial situation – right? No, unfortunately with mortgage lenders a debt deferred is treated as a current debt and Buy Now Pay Later does affect your mortgage application.

How much it impacts your mortgage application depends on several factors which we will outline in this Buy Now Pay Later mortgage guide. The good news is that with a reputable mortgage broker you may be able to source a mortgage with Buy Now Pay Later and oftentimes it will be less impactful than you might expect.

Let’s discover how buy now pay later agreements affect mortgages in more detail.

What is Buy Now Pay Later?

Buy Now Pay Later is a type of finance agreement that is self-explanatory.You purchase goods or services and have a grace period between the purchase and making the payment. It is common to encounter Buy Now Pay Later when buying furniture or fixtures and fittings (like bathrooms and kitchens).

Sometimes these finance agreements allow for a small grace period such as three months and other times you may find the grace period is very generous with your first payment on the debt being owed in 2 years’ time.

Often, the Buy Now Pay Later schemes have a very low interest rate or 0% interest rate for the grace period. The aim of these is to clear the debt before interest is charged when the grace period ends.

Other Buy Now Pay Later schemes have 0% or low interest rates even when the grace period ends.

It depends on how the lender sets up their finance agreements and Buy Now Pay Later deals vary widely. Providing they are compliant financial agreements, lenders have a great deal of flexibility about how they structure their products.

What About 0% Buy Now Pay Later?

Most Buy Now Pay Later deals have a headline 0% interest rate in the UK. This is because the 0% rate is attractive and reassures consumers they are not incurring costs by deferring payment of the debt.

In fact, these deals are so popular that 60% of consumers in 2021 reported using Buy Now Pay Later to finance a purchase.

They are attractive by design as many Buy Now Pay Later schemes are extremely profitable for lenders, especially in the form of fees and interest being charged after a set time.

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How Do Lenders View Buy Now Pay Later?

Lenders view all debt the same regardless of the terms or how that debt is structured. There are many debts that are problematic for lenders. Examples of these types of debt are:

  • Buy Now Pay Later
  • Hired Purchase Agreements
  • Credit Cards (including 0% cards)
  • Store Cards
  • Overdrafts on Bank Accounts

The lender will assess two features of the debt:

  • The total amount of debt you have outstanding,
  • Whether the debt becomes chargeable in the future and at what rate.

Bear in mind that a mortgage is a long-term commitment spanning many years. Even if you are not paying the debt today, you will be paying the debt before your mortgage term expires.

In cases where the Buy Now Pay Later is a substantial amount of money owed, you may find that lenders decline your affordability. For example, if you are going to be paying £500 per month to repay the debt in the future, this can seriously impact your mortgage affordability calculation.

What About Adverse Credit and Buy Now Pay Later?

Another factor that can enter the equation of Buy Now Pay Later is adverse credit.

As mentioned earlier, finance companies find Buy Now Pay Later to be very lucrative lending options and it is not uncommon for people to experience some difficulty repaying their debt. Finance companies offering 0% finance rely on you failing to make payments or not keeping your payment schedule so they can charge fees.

Failing to meet a financial obligation will impact your credit score negatively and mortgage providers will view you as a higher risk.

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Ways to Improve Your Chances of Securing a Mortgage

You should consider doing the following if you have a Buy Now Pay Later agreement:

  • Clear the debt entirely
  • Improve your credit score to rectify any damage
  • Discuss your situation with a Whole of Market Mortgage Broker

Clear the Debt

In all cases, if you are aiming to maximise the mortgage sum available to you, it is best to clear debt before making a mortgage application as then the outstanding figure will not negatively impact your affordability calculation.

You should also refrain from taking any more borrowing to pay off the debt if you are planning on making a mortgage application. This is because using debt to clear debt is often redundant in the eyes of a mortgage lender and may worsen your credit file temporarily. As credit files can take up to 6 weeks to update, you may be in a situation where both debts show on your file, even though one has been repaid.

If paying the debt is not possible, you should discuss the situation with a mortgage broker, like Boon Brokers, who will guide you further.

Improve Your Credit Score

If your use of Buy Now Pay Later or similar types of credit like credit cards or store cards has affected your credit score, you should work to improve your score.

All major credit reference agencies outline clear ways to improve your credit score with tailor made recommendations.

Not all recommendations are equal, and you may be advised to borrow more to extend your credit limit. Borrowing more in advance of a mortgage application is going to be detrimental unless you have the means to pay off the debt.

Speak to a Specialist

Mortgage brokers encounter all kinds of debt when conducting their business and with the popularity of Buy Now Pay Later it is little wonder why this debt is extremely common.

A reputable mortgage broker will be able to assess how much Buy Now Pay Later impacts your chances of getting a mortgage and make a recommendation for your personal situation. For example, some lenders are much more favourable to debt in their affordability calculations than others.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee free mortgage advice.

Contact us to discuss your mortgage requirements today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.