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That dress you purchased on Afterpay six months ago could impact your ability to secure a home loan.
Banks and lenders will now treat any buy now, pay later (BNPL) arrangements as ongoing debt when lenders assess home loans, which could come back to bite first home buyers.
Previously, buy now, pay later debts were listed as a living expense when borrowers assessed loans. But the industry watchdog, APRA, has stepped in, insisting on a change to the rules.
APRA has clarified in a letter to lenders that buy now, pay later schemes need to be included in debt-to-income ratios. This change to the lending standards must be followed by all banks and lenders from September this year.
Put simply, it means that banks will need to consider your buy now, pay later as ‘debts’ when determining how much you can borrow. Coupled with rising interest rates, it can be another major blow to Australians looking to buy their first home.
Sizing up the Sector
There are more than 30 buy now, pay later companies in the Australian market, including stalwarts Afterpay, Zip, Klarna, Openpay and the new Commonwealth Bank offering, StepPay, and NAB’s Now Pay Later.
According to a research report into the economic impact of BNPL by the Australian Finance Industry Association, there are 5.9 million active accounts in Australia, worth a collective $11.9 billion. The average transaction value is $151, with some providers lending for purchases up to $30,000.
Buy Now, Pay Later has been particularly popular among younger Australians, who tend to view the modern version of lay-buy as a better alternative to credit cards. The industry exploded during the pandemic as transaction volumes increased by 43% in the first year that Covid-19 hit, Deloitte research shows.
The industry has escaped regulation so far, but consumer groups are pushing for the government to put new rules into place to protect Australians from spiralling into debt—particularly as the economic conditions change and the cost of living rises.
A recent CHOICE survey revealed that in the past 12 months, some 21% of people who have used a buy now, pay later loan in the past 12 months have relied on it to pay for essentials, such as food, groceries, or utilities. The consumer group warns that while many consumers use buy now, pay later responsibly, it is a potential debt trap for others.
Tighter Restrictions Needed
The managing director of Payment Services, Brad Kelly, says the impact on buy now, pay later customers is a potential doomsday scenario as lenders are able to operate under their own code of practice. He describes the sector as a “small but noisy corner of the lending space”.
The recent inclusion of buy now, pay later in debt for home loan application purposes means that a dress you purchased 12 months ago via a lender could impact whether or not a lender will approve your home loan application, he says.
“Even if you’ve paid the dress off, the fact is that having relationships with a buy now, pay later company will impact your ability to purchase a home under this new change,” Kelly says.
The reason for this, he explains, is that lenders will be able to see that you’ve had a buy now pay later loan on your credit score, but they can’t see how much you borrowed, or whether you have paid that debt back, he says.
This means that the loan could be for $50, or it could have been for up to $30,000. And the more buy now, pay later agreements you’ve had, the worse you’re likely to fare when trying to secure a loan.
“Because of the way the law is written, the bank has to assume that those agreements are all maxed out because there’s been no credit check done (by BNPL providers) on those transactions,” Kelly says.