Lending conditions are now tougher than ever. As loan requirements become more stringent in the wake of the financial services royal commission, lenders have homebuyers spending habits under the microscope more than ever.
Future homeowners will now have to think twice about their discretionary spending on buy now, pay later services (such as Afterpay) if they want to get approved for a loan.
ASIC recorded more than 2 million consumers have used buy now, pay later services during FY17-18.
If you’re an existing buy now, pay later user and you’re in the market for a home loan, here's what you should know about how these online shopping commitments could impact you and why lenders factor these spendings as part of your home loan application.
Increased focus on personal living costs
Traditionally, lenders have estimated your ability to take out a loan using the Household Expenditure Measure (HEM), which calculates your living expenses based on your household and income. However, more banks and lenders are now looking into bank statements and scrutinising costs, such as entertainment subscriptions, gym memberships, food delivery services and online shopping.
Regular discretionary spending habits could be used to build up a profile of the kind of spender or saver you are, and these increased living expenses could potentially hurt your chances of getting a home loan.
Interest-free payment arrangements and your credit score
While buy now, pay later services may not be classified as a traditional form of credit (such as a credit card), it’s still considered an ongoing liability by lenders and should therefore be disclosed when applying for a home loan.
With your repayment history now being recorded on your credit file as part of Comprehensive Credit Reporting, if you miss a payment on your buy now, pay later account, most of these providers like Afterpay, Openpay and Zip Pay can report any negative activity (including late payments, missed payments, defaults or serious credit infringements, etc.) to credit reporting bodies which could impact your credit score.
The majority of lenders have updated their systems to record information about borrowers’ buy now, pay later commitments and it is expected that the rest will soon follow.
If owning a home is a priority to you, pay off any buy now, pay later commitments and don’t add any new ones to help increase the likelihood of getting approval for your new home loan.
As part of your application, it’s now increasingly common for lenders to request a minimum of three months of financial history to see how you manage your money, therefore, being prepared before applying for your home loan and making easy changes to your lifestyle in the months preceding a credit application can make all the difference.
Remember to check your credit score and credit file information regularly, so you can put your best foot forward before you apply. Credit Savvy helps you track your credit score and sends your alerts whenever there are changes to your credit file, for free, so you can manage your credit reputation with peace of mind.This article was originally published on Credit Savvy.