Brokers canvassed by Mortgage Solutions said they had seen some examples of borrowers being declined for using such services, but that lender’s attitudes were regularly changing.
Mojo Mortgages director of mortgages, Cassie Stephenson, said using such BNPL services could trigger “automated red flags” for some lenders, but they were constantly updating reporting and credit checks to ensure borrowers could make repayments.
“Each application is reviewed by lenders on a case-by-case basis so there is a chance that two first-time buyers both with a £1,000 worth of Klarna payments pending could get different decisions when it comes to mortgage eligibility. BNPL is just a snippet of an individual’s financial history,” she said.
She continued: “It is an area that’s changing all the time and if balances are paid on time, you shouldn’t currently have too many problems when it comes to your application.”
BNPL has been growing in popularity in the UK over the past few years, with a Which? survey in June estimating that around a third of the UK adult population had used a provider like Klarna, Clearpay or Laybuy.
These platforms allow users to make purchases and then spread payments over a set period, often interest-free.
John Charcol’s product technical manager Nick Morrey said whilst he had seen some lenders declining mortgages because they spotted BNPL services on bank statements, the decision was usually down to a combination of things.
He said: “As much as schemes like Klarna are helpful for people looking to make certain purchases, they are sometimes viewed as a sign that someone is living outside their net disposable income means by using credit to buy things they otherwise couldn’t afford or would have to wait months to pay for.”
He said it showed a “profile of financial habits” that some lenders might see as a higher level of risk compared with those who did not use them.
“The ultimate decision is usually down to the overall credit scoring model being applied and applicants who use these schemes regularly are likely to have other aspects of their applications that cause the overall score to be too low to pass,” he explained.
Stephenson noted that it wasn’t just first-time borrowers who could be negatively impacted by using BNPL products, but insisted those with existing mortgage may be in a better position.
She said: “All types of debt could affect any mortgage application whether that be a first-buyer, remortgage, buy to let and so on.
“The use of BNPL services could be seen as questionable on affordability to lenders and this where those with an existing mortgage could have an advantage as they could stay with the same lender or may be able to use equity to pay off any debt,” she explained.
What can borrowers do?
According to Stephenson, it is vital for borrowers to keep tabs on how lenders judge eligibility, particularly as BNPL is expected to grow in scale and usage.
She said: “The main thing to remember when contemplating a purchase in the run up to your mortgage application is deciding whether you really need it right now and how quick will it take you to pay off any balance from borrowing?”
Trussle’s head of mortgages Miles Robinson added that it was important for lenders to see a “history of responsibility” when it came to personal finances, therefore it was vital to have a good credit rating.
He added: “There are many ways to achieve a good credit score, including taking a break from applying for credit, paying off debts, keeping credit card borrowing low, and even applying to be on the electoral roll.
“You can also check your rating by getting a free credit report from a credit reference agency. Asking for your credit report does not affect your rating and the report should show you what’s impacting your score, which could help you improve it.”
Response of BNPL service providers
Founder of AppToPay James Jones said part of the issue could be from BNPL providers not sharing their account usage and repayment data with credit agencies like Equifax and Experian, which makes it more difficult for mortgage lenders to perform creditworthiness or affordability checks.
He said: “Using Open Banking or by looking at an applicant’s bank statements, the mortgage provider will be able to see an individual uses BNPL products but they have no way of predicting future usage or seeing the outcome of past use – for example, was the debt satisfied or not.”
Jones added that AppToPay is regulated by the Financial Conduct Authority (FCA), so account usage and repayment data is sent to credit agencies on a monthly basis.
Earlier this year, the UK Treasury said BNPL firms would come under the supervision of the FCA and require firms to conduct affordability checks before lending. Customers will also be able to make complaints to the Financial Ombudsman.
Many BNPL providers are unregulated by the FCA as they are exempt under the Financial Services and Markets Act 2000.
A Klarna spokesperson said it was “disappointed” that a small number of its customers had their mortgage applications declined by lenders.
The spokesperson added: “This is yet another example of traditional providers failing to understand modern consumers and how they manage their finances.
“People use Klarna and our BNPL products to access short-term credit that enables them to spread the cost of a one-off purchase for up to 60 days.”
The spokesperson added that to say this was indicative of people living beyond their means was “unfounded” and the majority of customers paid back on time and in full.
“To punish them for accessing new, short-term and low risk payment services is grossly unfair and we are engaging with mortgage lenders and brokers to help educate them on our products and their usage so they can be more accurately incorporated into any eligibility and affordability assessments,” the spokesperson said.
Growing concern in the future
BNPL services is likely to be a growing concern for mortgage brokers in the future as their use has increased during the pandemic and is expected to continue expanding in the future.
According to figures from the FCA earlier this year, the use of BNPL products nearly quadrupled in 2020 with five million additional people using these products since the beginning of the pandemic.
Research from BNPL travel firm Butter predicted the UK’s BNPL sector will be worth nearly £27bn by 2024.
The users of the platform are also expected to become more diverse, with a wider range of borrowers potentially having BNPL services on their banking statements.
Stephenson said: “Thinking back to payday loans – this is an area that has changed mortgage eligibility significantly in recent years. Taking out one of these loans wasn’t a problem for many lenders a few years ago but if you can take one out now it’s likely you will need specialist help.
“This is of course a very different case to BNPL options, but highlights how lenders can and will change their minds on the criteria used to judge affordability.”