Mortgage brokers have warned first-time buyers need to "change their mentality" to debt as the growth of buy now, pay later makes affordability checks more awkward.
BNPL, a service offered by companies such as Klarna, Afterpay, Laybuy and Zilch, allows consumers to buy a product online and pay for it gradually through a series of payments.
According to research by Finder, 37 per cent of people in Britain say they have used a BNPL service - a number which increases to 54 per cent among millennials.
And the sector is continuing to receive funding - with Zilch recently raising £80m from Goldman Sachs.
But recent reports have drawn attention to how BNPL services are affecting first-time buyers’ chances of getting a mortgage because of the affordability process.
Pay back arrangements such as the ones BNPL providers offer at checkout count as expenses. If, added together, a potential borrower’s expenses make a mortgage unaffordable, then the lender cannot issue them that particular mortgage.
Together with credit cards and other forms of debt, this means BNPL can affect a borrower's mortgage application.
“I had a 40-year-old client with 20 items of finance,” Ellen Roome, director of mortgage and insurance provider The Finance Roome, told FTAdviser. She referenced BNPL, credit cards, and car loans.
In response to fears over finance ruining young people’s chances of getting a mortgage, Roome said: “You can’t have it both ways. There comes a point where it becomes the borrower’s own fault.”
To solve the issue of young people becoming ‘trigger happy’ with finance options, Roome reckons “these buyers need to change their mentality” and learn how to prioritise. She added: “Most people in years gone by wouldn’t have run up debt on money they didn’t have.”
Education over regulation
One way to change this mentality, Roome said, would be to introduce financial advice earlier on in their lives, and to improve debt education at a school level.
In response to the rising popularity of BNPL products, the Financial Conduct Authority is in the midst of bringing interest-free BNPL products under its jurisdiction alongside interest-bearing ones, but Roome believes imminent regulation “won’t change behaviour”.
Hiten Ganatra, managing director at Visionary Finance, agreed “better financial education in schools around the BNPL culture” is the answer.
“As mortgage advisers, we are seeing more and more younger first-time buyers with adverse credit or blips in their credit history, especially since the start of the pandemic. This is often also coupled with a lower deposit.
“Unfortunately many young people are unaware that using payment providers that allow them to BNPL, such as those available on many popular clothing and beauty sites, can adversely affect their ability to attain a mortgage at a time when they are eager to get on the property ladder.
“As young people have more and more accessible credit, it is absolutely imperative that they are educated to know how this could affect their dreams of home ownership in the future.”
Pay them off now
Chris Sykes, an associate director and mortgage consultant at Private Finance, told FTAdviser he has seen clients with “sofas, TVs and other items on BNPL schemes” where the finance taken out hasn’t affected borrowing “whatsoever”. This was because the clients had “few other commitments so there was still plenty of affordability”.
Sykes continued: “Commitments taken for large ticket item purchases affect affordability and what a client can borrow due to other background debt.
“Sometimes, the simple answer to this is to pay the loans off if that is do-able. Especially on BNPL arrangements, it often isn’t a whole lot of money being dealt with and if a client were to just pay it off the majority of lenders can discount it from their affordability calculations.”
In response to the BNPL sector’s popularity, UK banks have begun launching options to repay their credit card spend in instalments.
HSBC’s ‘instalment plans’ feature allows customers to divide spend of at least £250 into equal payments over up to 12 months. Natwest has launched a similar service, which allows customers to pay off a purchase or expired 0 per cent balance transfer over a period with a monthly fee.
But as the banks clarify, debt is debt, which means taking out finance with the bank you’re hoping to get a mortgage from is no different from using the likes of Klarna.
ruby.hinchliffe@ft.com
