What does “Afterpay” really mean for me in the long run.
With the Royal Commission and tightening of lending policies, we are going to see a very different lending landscape in Australia. Unfortunately a lot of people including our first home buyers are not aware of how all these new products where you buy now and pay later, may actually mean they will pay later by losing their opportunity to have the Australian dream of buying a home one day… I have invited Andrew Evans of Mortgage Guy to explain what buying products with “after pay” really means for their credit rating…. I will be inviting our close working partner advisors to share their intel with our readers over the next couple of months.
Introduction written by Adriana Care, Managing Partner, Coutts
Ever seen that must-have-now item that you don’t have the cash for right now? What if it was four equal instalments? Interest free payment app, Afterpay , is taking the retail space by storm because it allows shoppers to get what they want now and worry about paying for it later.
Afterpay has seen dramatic growth over the last few years with more and more retailers coming on board. With even Jetstar joining the party for domestic flights , it’s getting easier than ever to buy now and pay later.
But what are the down sides? According to this article on ABC News, Afterpay made over $28 million in late fees from when its customers miss a payment. Make sure you don’t contribute by paying on time.
However, now that you’ve got your eye set on that amazing home, Afterpay might have some unexpected impacts.
Your credit file
Everyone who applies for the ever-necessary home loan will have their credit file checked by the home loan lender they apply to. The lender will look for black marks such as defaults and more recently repayment information on your existing financial commitments .
All this information is used to determine a credit score – a magic number that decides whether the lender will loan you money, or not.
Will Afterpay appear on your credit file and affect your credit score? Probably not, but it is certainly possible. Currently, Afterpay does not appear to do credit enquiries which means it shouldn’t affect your score every time you use the service.
However, the Afterpay T&C’s do give them permission to put credit enquiries on your file and to report “negative activity … (including late payments, missed payments, defaults or chargebacks)” to the credit reporting agencies. If you end up behind on your payments you could find yourself in the credit score badlands. As a mortgage broker, I have seen loans declined purely based on having too many enquiries on their credit file.
The best thing you can do if you must use Afterpay is not over use the service and keep an eye on your credit file which you can do for free, once per year.
Your expenses
The other potential impact from using Afterpay is on your living expenses. Living expenses is a huge focus now and it’s all about ensuring lenders have an accurate idea of how much you’re spending of day to day costs plus of course, splurging on smashed avocado on toast .
The home loan lenders are still figuring out how they handle Afterpay. They can’t treat it like a credit card because it only lasts four payments. Many have settled on including it in your living expenses. With most banks requiring bank statements on all accounts (and some up to 4 months!) they are going to see your Afterpay payments and want to take it into account. A heavy Afterpay user with lots of large payments (like for domestic flights) is going to have an undesired impact on their borrowing power.
What about how it looks
The other intangible downside is that it just doesn’t look great to a home loan credit officer. Some home loan credit assessors perceive Buy now, Pay later services with negative connotations. When you’re trying to buy that dream home the last thing you want is for that 75” flat screen that you Afterpay’d to cause a decline.
So, what should you do?
I have plenty of customers using Afterpay and still getting home loans. However, I have also seen extra focus put on deals with these payment services. A bad credit score is something to be avoided.
The key to everything is moderation. Here are my top tips for being able to get that house:
- Don’t be lured into purchasing something you can’t afford. Even if it has a payment plan.
- Only use the Buy now, Pay later services when you need to and ensure you can pay it off comfortably without incurring late fees. Or better, use a service I call Save now, Buy later – it’s free!
- If you’re in trouble, the worst thing you can do it ignore it. Be open and talk to the lender – you will have a very different conversation that if they have to chase you up. There are also financial counselors available to help.
Article written by Andrew Evans, Broker for Mortgage Guy
If you are planning on buying or selling a home, we can assist with all your conveyancing needs. For information and advice on mortgages, our team can pass on your details to Andrew Evans.
Adriana Care
Managing Partner
adriana@couttslegal.com.au
1300 268 887
References:
[AE1] https://www.afterpay.com/en-AU/how-it-works
[AE2] https://www.jetstar.com/au/en/afterpay
[AE3] https://www.abc.net.au/news/2018-08-24/afterpay-late-fees-24pc-income-asic-loophole-credit/10156902
[AE4] https://www.canstar.com.au/credit-score/what-is-positive-credit-reporting/
[AE5] https://www.afterpay.com/en-AU/terms-of-service
[AE6] https://www.mycreditfile.com.au/products-services/my-credit-file
[AE7] https://www.smh.com.au/business/banking-and-finance/apra-pressures-banks-over-customers-living-expenses-claims-20180530-p4ziet.html
[AE8] https://www.news.com.au/finance/money/costs/avocado-toast-mortgages-have-gone-global/news-story/0e691bfafc89e2d1511a7cbdfd074e9c
[AE9] https://www.financialcounsellingaustralia.org.au/Home
This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.
