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How Afterpay can hurt your chances at a home loan

How Afterpay can hurt your chances at a home loan

Retail payment facilities like Afterpay and Zippay, can seem like wonderfully convenient options, but can it impact your chances of getting a home loan?

The short answer is yes, especially if it is your first home loan.

How does Afterpay/Zippay work?

Afterpay and Zippay are innovative retail purchase payment options. You could consider them the modern approach to layby – only they allow you to take home your items now and pay for them later. These facilities are easy to set up, without lengthy application processes and delays that you often find at a bank. They are seamlessly integrated into an online store’s checkout. You can simply choose to pay with Afterpay, your payment plan is automatically calculated, and your purchase is on its way. Payments are usually made in four fortnightly instalments direct debited from your bank account or credit card. There are no fees or interest on repayments unless you can’t make the payment (make sure you understand the late payment fees). They are now also increasingly becoming available in-store as well.

Sounds like a fast and easy cash flow solution, especially at Christmas time, right?

While it is true that Afterpay can help to solve an immediate cash flow issue, it may impact your ability to secure a home loan.

How you manage short-term consumer debt is part of what you are assessed on when you apply for a home loan.

What is consumer debt?

Consumer debt includes credit cards, interest-free facilities, and buy now, pay later facilities.

Some forms of consumer debt might not even feel like debt to you. If you’ve bought a new lounge suite under an ‘interest-free period’ deal from a big box store, that’s consumer debt. A car lease also counts. In fact, anything that you’ve taken possession of now but haven’t already paid for in full might come into this umbrella.

So why does it matter?

If you are using facilities like Afterpay for discretionary purchases, it may raise questions for lenders about whether you are living beyond your means. If you do not have enough cash reserves to make purchases, how will you manage unanticipated expenses once you have a home loan?

If the repayments are being debited from a credit card, this may raise further red flags for lenders about how well you manage your money.

Buy now, pay later facilities tend to encourage poor spending habits. When people have a facility like this, they tend to make impulse purchases that they probably wouldn’t if they had to save for four weeks to buy it.

A credit check may be performed when you apply for the facility, which can affect your credit rating. A credit report with several credit enquiries lowers your overall score with lenders because it implies you are living from paycheque to paycheque and do not have enough cash reserves to draw on for unanticipated expenses.

If you are considering applying for a home loan in the next six months, it is recommended that you don’t use short-term consumer debt as a way of getting by. Instead, take a look at your spending habits, find ways to cut back and build a good savings habit. You can still treat yourself, but with the money you have – not borrowed money.

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