A young woman revealed that having a buy now, pay later account was one of the reasons she was denied a loan to buy her first property.
This year, Lou, a 22-year-old Sydney resident, was denied the mortgage loan she needed to buy her $500,000 home by the big banks.
He is in his final year studying commerce and IT at Macquarie University in Sydney, but also works full-time in the technology sector.
Lou had only $16 left to pay on his Afterpay account and only $38,000 in HECS debt, Yahoo reported.
With more than $100,000 saved up to cover the deposit, a full-time job and a bright future ahead of her, she was surprised that every bank turned her down.
“When I applied to different lenders, I went through a debt capacity calculator with them and saw the difference between whether I had HECS debt and whether I didn’t,” Lou said.
The student added that the gap was “so huge” that she was unable to even get to the stage of formally applying for the loan with most lenders.
Lou (pictured) believes the main reason his home loan applications from major banks were rejected was because of his Afterpay account and his $38,000 HECS debt.
Her HECS debt reduced the amount of money she could borrow by between $50,000 and $90,000.
“It was a huge difference. I was in shock. I didn’t realize how much it would affect me,” she said.
The 22-year-old finally got pre-approved for a home loan with an online lender, but she had to do one thing as a condition.
“With my Afterpay debt, they saw it on my statement and told me I needed to close it and send them an email with my confirmation that my account had been closed,” she said.
Lou only had one Afterpay payment left of about $16, and he had never missed a payment in the three years he had used it.
After closing her BNPL account, Lou was approved for a $450,000 home loan and purchased her first home – a two-bedroom apartment in Western Sydney.
Money.com.au expert in mortgage loans and Soren Financial Director Mansour Soltani told Daily Mail Australia that BNPL accounts like Afterpay can dramatically reduce a borrower’s borrowing capacity as it indicates spending beyond their means and a lack of financial discipline.
“Afterpay or any BNPL debt is a no-no,” he said.
We always recommend that borrowers close these accounts before applying for a mortgage loan.
‘If you decide to keep them open, keep in mind that the bank advisor will review these accounts line by line.
“And if there are any suspicious purchases (for example, using these accounts to pay utility or grocery bills, etc.), this is a red flag and may affect the outcome of your application.”
Mr Soltani said there is a formula borrowers can use to calculate how much their BNPL accounts will affect their borrowing capacity.
“When you look at the effects of a BNPL account, as a general rule, it’s a multiple of five,” he said.
With more than $100,000 saved for a deposit on her first home, Lou was shocked to learn that her Afterpay account and $38,000 HECS debt were taken into account in her home loan application (file image)
‘What this means is that if you have $2,000 in BNPL this affects your borrowing capacity by $10,000.’
Mr Soltani said the stakes were just as high with HECS debts.
“Banks treat HECS debt like a personal loan, and the general rule of thumb is that for every $10,000 of HECS debt, your home loan repayment capacity is reduced by $40-50,000,” he said.
Mr Soltani revealed that paying off most of the HECS balance will make no difference to the lender.
“Unfortunately, partially repaying your HECS debt will not improve your ability to repay your home loan,” he said.
‘All debt must be settled and should show a $0 balance on your ATO portal.’
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