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 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.

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.

“It’s the layby of our day but in reverse. It’s your forward credit for an item, which I don’t agree with,” said one leading mortgage broker.

“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 one per cent of people doing that and the rest of them are spending beyond their means,” the broker added.

As a result, according to this broker, there may 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.

“I would much prefer to see my clients save for the item and demonstrate those good habits.”

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

“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,” the broker said.

In this Summer edition of Simply Living, we explore some of the key considerations in the RBA’s decision-making process as it relates to setting the cash rate, as well as consider for parents when contemplating loaning money to their children to help out with purchasing a home. And finally, we look at ways in which a home loan can be paid off sooner.

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According to 2016 Deloitte research, prospective home buyers are using mortgage brokers to secure home loans because they expect brokers will save them money and assist them through the home loan application process.

If you decide a broker is for you, you’ll engage with them in a number of key stages throughout the application process and beyond.

Before application

Your broker will consult with you to establish your financial and lifestyle goals, responsibilities and commitments. You may have an idea in your mind of what you want, and the first meeting with a broker can help you refine this and develop an action plan to make your aspirations a reality.

After reviewing your financial circumstances, your broker can determine your borrowing capacity and they can outline repayment scenarios. They must make reasonable enquiries to check if proposed products are suitable for you. They can also put you in touch with a variety of other complementary service providers, such as financial planners, real estate agents, lawyers and property agents, who will also help you achieve your goals, as and when required.

In preparation for a loan application you will need to supply some supporting documents. Examples of these documentation you will typically provide include personal ID, evidence of your income, proof of savings and details of existing financial obligations. (Click here for more information on required documents). Your broker is required to maintain confidentiality of the information that you provide and only pass it on where necessary to secure your finance or where required by law.

Your broker can also consult with you to explain how features, fees and charges attached to your loan options compare and affect the overall amount you will repay on your loan.

Application 

Once you’ve consulted with your broker to determine your preferred loan, they will submit your application and documentation to the lender.

Before you seek full home loan application approval, it’s also common to apply for home loan pre-approval.

By signing a contract on a property prior to securing unconditional approval, you run the risk of forfeiting your purchase deposit if your subsequent loan application is declined. Pre-approval is less onerous than the full home loan application and gives you a good preliminary indication of your borrowing power. Your broker can assist you with applying for pre-approval as a step to help you determine which property price bracket may best suit you.

Your broker will let you know when your lender has issued an unconditional approval on your loan application.

Approval and settlement

After your home loan application is approved and settled, your broker will follow up with you to ensure you understand how to pay the loan and to answer any enquiries you might have.

It’s also common for your broker to contact you regularly, offering to check that your loan still suits your needs. It’s possible, for example, that you might be better off switching from a variable to a fixed interest rate loan, or switching products for a better deal. Your broker will help you with this decision by maintaining long-term contact. 

The more aware you are of the support your finance broker has to offer in the home loan application process, the better positioned you are to navigate the process comfortably and successfully.