Afterpay hangover? Beware of impact on home loan approval
Off the back of Christmas spending, a finance expert has warned that your Afterpay habits could negatively impact your home loan application.
Using services like Afterpay too frequently has the potential to impact your loan application in two ways: first by putting a dent in your credit score and secondly by demonstrating poor money management habits to your mortgage lender.
"Unfortunately, we see younger clients being swept up in the convenience of Afterpay, but they perhaps may not have disciplined spending and budgeting habits," said finance broker Rose De Rossi, director of Diversfi in Perth.
"This can impact their borrowing capacity when they apply for a bank loan. When they apply for any type of loan, any late payments will affect the panel of lenders (who are) available to assist them, which means they may need to consider borrowing through a non-conforming lender at a higher rate or wait until they have clear credit history."
Afterpay states that having an account with them "does not affect your credit rating, even if you pay late", and as long as you're using Afterpay in a responsible way and make your payments on time, then your credit score and history shouldn't be affected directly.
However, the potential for problems kicks in when you read the fine print of the terms and conditions. Here, Afterpay makes it clear that it reserves the right to check your credit and that it can report any negative activity on your account to credit reporting agencies.
Specifically, they call out that by opening an account with them, you authorise them to "report any negative activity on your Afterpay account (including late payments, missed payments, defaults or chargebacks) to credit reporting agencies".
"To avoid ruining your future home loan for the sake of a few shiny Christmas gifts, set up a direct debit to your buy now pay later service, maintain your repayments and then close the account when the purchase has been paid off," De Rossi advised.
She added that since the Royal Commission and the APRA-led tightening of loan criteria, banks and lenders are doing "more forensic examination of a client's living expenses", which includes discretionary spending.
"Afterpay accounts are basically a store credit card and monthly commitments on these accounts are calculated exactly the same way as a bank credit card, which is usually 3.8% of the limit of the account," she said.
"If you currently use Afterpay and you want to buy a home in 2021, my suggestion would be to close the account altogether. Afterpay is usually used for one purchase at a time so once you have paid it off, close the account and receive a confirmation. Lenders will want to see proof that the account has actually closed as paying it off does not trigger closure."
Paying your account balance off in full becomes an even bigger priority if you have an Afterpay account in arrears, she said, so you need to clean up your finances ahead of applying for a loan.
"Anyone contemplating applying for a home loan this year should start to track their monthly spending," she said.
"Avoid regular gambling, minimise your Uber Eats, check your credit card limits and reduce them to manageable and realistic levels – then save, save, save!"