Applying for your first home loan is a big step. It can be seen by many as a time-honoured ritual that indicates you’ve embraced ‘adulting’ and are ready to start a new chapter in your life – one as a homeowner.
So, after saving and saving, and finding the right property and putting in all that work to get the application ready, it can be a devastating blow to get a hard pass from the bank.
Buy now pay now, it seems
Learning that the bank has deemed you unworthy can be heartbreaking, but also, surprising. After all, you did all that work to make sure your paper profile was as good as it could be. Got rid of credit card debt, demonstrated a good savings record, paid bills on time, paid rent on time – so much good work! So what went wrong?
Four tiny little words – buy now, pay later.
Since the rapid rise of the buy now pay later (BNPL) phenomenon, led by behemoths Afterpay and zipPay, young people have been lunging for the shopping catalogues and kicking the bill down the road in rapidly growing numbers.
New research from Roy Morgan shows “1.95 million Australians used one of the latest ‘buy-now-pay-later’ digital payment methods such as Afterpay, zipPay or zipMoney in the year to September 2019, up from 1.38 million in the previous 12 months”.
The data shows Australians under 35 years are dominating the pay later user demographic, with almost 56 per cent of users aged 14 to 34 years.
The growth of this type of credit has propelled Afterpay co-founder Nick Molnar into becoming Australia’s youngest self-made billionaire, at 30 years old
In 2020, ASIC research into the BNPL industry found that in order to meet repayments on time, one in five consumers missed or were late paying other bills or loans; or, cut back on or went without essentials such as meals.
So, what’s the problem?
A key problem with using BNPL services is that unless you have a good focus on your budget, it’s very easy to get into trouble, by losing track of how many products you’re paying off.
The reality is that people are buying products they simply can’t afford and then just deferring the problem for another time.
For baby boomers and Gen x’s, the BNPL phenomenon is simply lay-buy in reverse. However, with lay-buy you never actually received the product until you’d fully paid for it. Whereas, now, you receive it in advance, get that instant gratification, and then worry about the financial stuff later on.
Barefoot Investor, Scott Pape, quoted ASIC data in his book, The Only Money Guide You’ll Ever Need, saying “The majority of Afterpay customers are millennials. One in six of them are in financial strife… getting overdrawn, delaying bills, or borrowing more”. He describes these types of services as the “marijuana of credit” because “it acts like a gateway financial drug: it’s effectively training young people to rely on the bank’s money rather than banking on themselves”.
But the real problem with them is that lenders see them as an ersatz credit card, which means if you have an account with one of these BNPL services, it counts as a credit card-sized cross against your name when you’re applying for a home loan.
The bank said no because of my Afterpay account?
Well, it’s unlikely that your Afterpay account is the only reason, but it’s a strong contributing factor. Having a well-worn BNPL account is an indicator of your budgeting skills and suggests a reliance on credit to make small purchases (the average Afterpay purchase is just $150, which is a pretty small amount to have to pay off in instalments).
Also, the more often you go to that well, the more likely you are to fall in. Or, to put it another way, the more often you make frequent purchases via BNPL the more likely you are to miss a payment and incur fees.
The reality is, you have a credit commitment and this can be detrimental to your borrowing capacity, especially if you have poor history of missing repayments.
Why else would the bank say no?
There are a range of factors that lead to a declined application.
Consumer debt is the biggest factor, particularly in younger applicants. A car loan, a personal loan, high credit card limits (irrespective of a zero balance), patchy spending habits, equally patchy savings habits – all add up to a risky borrower.
Probably the biggest factor is your income, relative to your debt levels. This is your debt-to-income ratio and if the debt levels start to rise too high, without a similar increase in your income then you become an even riskier proposition for the bank.
In times past, when housing markets were on a tear, loans were becoming disproportionate. In 2018 APRA sent a letter to lending institutions, urging them to pump the brakes a little and adopt a more conservative approaching to lending, suggesting a loan to income cap of six times should be the upper limit.
What this means is that, generally speaking, borrowers will start with a capacity of six times gross income i.e. your gross income is $80,000, then your borrowing capacity, at 6 times this equals around $480,000 before accounting for any other credit facilities.
Then as the lender assesses the home loan application, each little bit of debt and each financial commitment that has accrued serves to reduce the borrowing capacity, gradually chipping away at it until the bank judges the capacity to service the amount being asked for is not there.
And this can then lead to a declined application.
It’s important to understand that this is not the end of the road. There are ways to remedy the issues that led to a decline.
However, it is probably time to seek the services of a professional and engage in a process of addressing the roadblocks so you can get a clear run to owning your own property.
Here’s some simple steps to assist you:-
- Get rid of BNPL facilities if you don’t need or aren’t using them
- In fact, teach yourself to save for the product and then pay cash for it, it’s far more gratifying
- Reduce or cancel credit card limits
- If you don’t need that personal loan or car loan, don’t take it
- Develop a savings plan that is equivalent to a future home loan repayment
- Save more than this if possible as owning a property also comes with additional costs such as rates and insurance, not to mention repairs and maintenance
- Consider a 2nd job to boost your income
Most of this is common sense when reading it but sadly, the financial literacy of Australians is quite underwhelming meaning that the great Australian dream is simply beyond some people because of their poor habits.
The good news is, with the right advice and assistance, anyone can do this.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.