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Hidden Dangers of Buy Now Pay Later for Home Loans

The Buy Now Pay Later sector is winning-over the youth demographic with the promise of instant gratification, but leading mortgage brokers are warning that with every sugar-high comes the risk of a corresponding low.


‘Buy Now Pay Later’ providers such as AfterPay, Klarna and Zip Pay have experienced massive growth in popularity, with the number of users jumping from 400,000 to approximately 2 million between 2015 and 2018. ASIC found that 60% of users were aged 18-34. With more platforms emerging and more websites jumping on the trend to make it available, it is an unavoidable part of online shopping.

Driven by a simple proposition whereby the Buy Now Pay Later provider pays the merchant on behalf of the customer, allowing the customer to obtain the goods or receive a service immediately while subsequently paying off the debt generally through instalments, Buy Now Pay Later presents a tempting offering.

But as the sector’s breakneck growth continues, mortgage professionals are warning users, particularly in the younger demographic, to be cautious of overdoing it as this could risk effecting their chances of securing a home loan further down the track.

In theory, it makes sense. You get the item or service and pay it off over instalments, so you’re actually putting forward your liability. This might be ok for someone that manages their money well, if they pay off the item on time and use their mortgage offset account correctly. This way they’re delaying expenses and offsetting more of their savings against their home loan. But there’s probably a small percent of people doing that and the many are spending beyond their means.

As a result, there could also be a stigma associated with using Buy Now Pay Later schemes rather than paying up-front and in-full. Utilising this payment method may potentially send the wrong message to a bank.

If a lender sees a ‘buy now pay later’ provider frequently on a client’s bank statements, that can trigger more questions about their spending behaviours and ultimately may mean they choose to decline the application.

Much like a credit card, even though it can be managed responsibly, it still can present a risk in the eyes of lenders. Some brokers would prefer to see their clients save for the items and demonstrate those good habits. It is ideal to reduce the Buy Now, Pay Later commitments before applying for a home loan – if you can afford the item, pay it outright – as it will help reduce your overall expenses and improve your approval changes. As long as you’re living within your means, and disclose it during the application process, the process should go smoothly.

Similarly, closing unused and unnecessary credit cards, or even reducing their limit, is also an essential step before applying.

It’s important to appropriately manage your expenses well in advance of applying for a home loan, that way you can show the bank that you can save and afford to service a mortgage when the time comes.

If you are concerned about your level of expenditure or your ability to secure a home loan, a conversation with our friendly mortgage brokers could set you on the right path.