How A $16 'Buy Now, Pay Later' Debt Blocked A Woman From Getting A Home Loan Despite $100k Savings

The popularity of buy-now-pay-later (BNPL) apps is growing rapidly, as are defaults and delinquencies. The slump in job markets and wage growth, alongside the high cost of borrowing due to elevated inflation, have already strained household budgets. Easier access to credit and flexible repayment options also lure younger generations to tap into loans even when it is avoidable. Significant savings and a clean repayment record should likely offset any risks associated with your existing liabilities when you apply for a loan. However, Lou, 22, was surprised when her mortgage application for a $500,000 home was denied, and a $16 debt on an Afterpay BNPL account was among the reasons.

Lou is a final-year commerce and IT student at Macquarie University in Sydney, Australia. She also works full-time in the tech industry. In the three years she has used credit products, Lou has never missed a loan repayment deadline and diligently saved up $100,000 for the downpayment on her first home.

An HECS Debt Can Reduce The Loan Amount Significantly

When applying for a mortgage with different lenders, she couldn't get the desired home loan because her $38,000 HECS loan didn't make her eligible with the big banks. The Australian government offers HECS-HELP student aid to cover tuition costs, which students repay through the country's taxation system once their income reaches a certain level.

"When I was applying with different lenders, I went through a borrowing capacity calculator with them and saw the difference between if I had a HECS debt and if I didn't," Lou said. She was shocked to see the massive difference. The HECS debt reduced how much she could borrow by up to $90,000, which delayed her property purchase plans. Although Lou eventually received a pre-approved home loan offer from an online lender, the application process couldn't be completed with her $16 Afterpay BNPL account debt.

The lender flagged the BNPL debt on her statement and would approve the loan only if Lou repaid the loan and closed the account. She was also required to furnish confirmation of the loan repayment and account closure via email before a $450,000 home loan was approved. Lou's first home is a two-bedroom apartment in Western Sydney.

BNPL Debt Can Drastically Reduce Borrowing Capacity

Soren Financial director Mansour Soltani reportedly urged borrowers to close their BNPL accounts if they apply for a home loan because the stakes are just as high as HECS debt. He thinks BNPL accounts can severely reduce the amount you can borrow and even lead to loan application rejections, which is a bad outcome for your credit report. "Afterpay or any BNPL debt is a no-no," Soltani said.

When you apply for a home loan, lenders will check your credit score and report to determine your creditworthiness before deciding on the loan terms. Soltani believes that lenders often check active BNPL accounts for suspicious purchases, such as using these accounts to pay utility bills, which can become a problem and affect your loan application result.

He also shared a formula for borrowers to gauge how BNPL debt affects their borrowing capacity. "When looking at the effects of a BNPL account, you are looking at a five times multiple as a rule of thumb," Soltani explained. Accordingly, a $5,000 BNPL debt can affect your borrowing capacity by $25,000. Soltani continued that banks often view HECS debt as a personal loan, "and the rule of thumb is that for every $10,000 of HECS debt, your home loan serviceability is reduced by $40,000-$50,000." He concluded that making partial repayments to your HECS debt won't improve your home loan serviceability. "The entire debt needs to be cleared," he concluded.