Will my buy now, pay later habit impact my ability to get a mortgage?

Buy now, pay later (BNPL) platforms have taken the shopping world by storm, offering us a convenient way to snag those must-haves without breaking the bank upfront, and they’re particularly tempting during the lead up to Christmas. But, as with all things financial, it's important to tread carefully.

BNPL platforms like Afterpay and Laybuy have become household names for a reason, they allow you to split your purchase into manageable instalments over time, often with little to no interest.

In New Zealand, BNPL transactions may not directly impact your traditional credit score. However, they can indirectly influence your creditworthiness. If you miss a payment, it could lead to late fees and potentially even debt collection proceedings, which could have a negative effect on your credit history.

Overindulging in this payment method can lead to a cycle of continuous debt. Keep a close eye on your spending habits, especially when using BNPL. It's easy to get carried away with the allure of deferred payments, so regularly review your purchases to ensure they align with your budget and financial goals.

How can it impact my ability to get a mortgage?

One of the crucial factors that lenders consider when evaluating mortgage applications is the debt-to-income ratio (DTI). This ratio represents the portion of your monthly income that goes towards debt payments. If you have outstanding BNPL balances, they will be included in this calculation. High DTI ratios can signal financial stress to lenders, potentially affecting your mortgage approval chances.

In addition to that, if payments are missed or consistently late, it could lead to negative entries on your credit report. This, in turn, can have a detrimental effect on your overall creditworthiness, potentially making it more challenging to qualify for a mortgage.

Lenders are keen on assessing the financial stability of applicants. Regular and timely payments on existing financial obligations, including BNPL agreements, demonstrates responsible financial behaviour. On the other hand, a history of missed payments could raise concerns about your ability to manage additional financial commitments like a mortgage.

Falling into the trap of BNPL payments can also reduce your disposable income overall. Lenders consider your disposable income when determining how much you can afford to borrow for a mortgage. If a significant portion of your income goes towards BNPL repayments, it may limit the amount you're eligible to borrow for a home loan.

I’d recommend taking great caution if considering using a buy now pay later platform for your holiday shopping, or any time during the year. And as always, if you need some advice to get you in a better position to achieve your financial goals, get in touch and let’s chat!