New research has claimed that a "perfect credit score" is no longer a guarantee of mortgage approval, with some lenders rejecting applicants for their habitual use of Buy Now, Pay Later (BNPL) services.
A survey of 21 mortgage brokers, commissioned by Sky News and the Association of Mortgage Intermediaries (AMI), revealed that two-thirds (67%) of brokers said BNPL use had either played a part in or caused a client's mortgage application to be rejected by a high street lender.
The findings demonstrate how lenders assess risk, with underwriters looking beyond a simple credit check and considering other relevant information. For example, in many circumstances lenders will request to see past bank statements.
The 'Perfect Score' rejection
Surprisingly, the AMI survey revealed an instance where a mortgage broker reported a client with a "perfect credit score" was declined by four separate high street lenders due to using BNPL services a "few times". In another instance, a client was rejected after a lender's analysis identified 33 deferred Klarna payments over a 12-month period.
Furthermore, where brokers experienced negative outcomes, the research found that:
- 40% of customers regularly used BNPL
- 21% "habitually" used BNPL services
- 13% "occasionally" used BNPL services
- The remaining 26% did not use BNPL services
BNPL use could also impact your mortgage interest rate
The AMI survey also revealed 27% of brokers reported that clients' BNPL use led to them being accepted but on a higher interest rate. That means their monthly mortgage repayments would be higher than the figures they'd initially researched.
How can mortgage lenders tell if you use BNPL services?
Mortgage lenders have two main ways of viewing BNPL usage when you apply for a mortgage. The most common method is to review your bank statements, which are submitted as part of your application. Underwriters will be able to see repayment transactions to firms like Klarna or Clearpay.
The other way that a lender may see details of BNPL transactions is via your credit report with one of the main Credit Reference Agencies (CRAs) in the UK. Responsible use of BNPL should not affect your credit score with each agency, and BNPL services usually only make soft credit checks, unless you apply for longer-term repayment plans (which aren't visible to mortgage lenders). However, major BNPL providers like Klarna have been sharing payment data with Experian and TransUnion since 2022, meaning this information is visible to lenders who review your detailed credit report.
Ways in which BNPL use could be assessed by lenders
Despite the research findings, it's important to note that use of BNPL services does not automatically mean that you will be rejected for a mortgage loan or placed on a higher rate of interest. That's because the way lenders view BNPL payments, when assessing a mortgage application, is inconsistent. A person rejected by one lender for their BNPL habits could be approved by another. Lenders generally fall into three categories when assessing BNPL usage:
1) BNPL use is ignored completely (or in certain circumstances)
Some lenders do not factor BNPL into their approval decisions at all, viewing the agreements as short-term loans. Others only consider it under specific conditions, for example, if the term of the BNPL payment schedule has more than six months left to run. Some lenders are happy to ignore occasional BNPL transactions, but it may still be seen as a sign of financial stress which might impact your chances of getting approved for a mortgage.
2) BNPL is factored into the lenders' affordability assessments
Some lenders treat BNPL as a fixed financial commitment, just like a car payment or personal loan. This reduces an applicant's disposable income, which in turn can limit the total amount they are able to borrow.
3) BNPL use is assessed as a behavioural risk
It is always likely that lenders will conduct a manual review of bank statements when you apply for a mortgage. Any evidence of habitual or regular BNPL use could be seen as a sign of poor money management. The lender is making a judgment on whether the applicant can manage their day-to-day spending. An applicant who consistently defers small payments may be seen as a higher long-term risk for a 30-year mortgage, regardless of their credit score.
Tips for BNPL use ahead of a mortgage application
While using BNPL services won't necessarily prevent you from securing a mortgage, it may limit your choice of lender and impact the rate of interest you are offered. So it would be prudent to:
- Prioritise your bank statements - A lender will likely ask for at least the last 3 months of bank statements. So your aim is to ensure your statements present a clean, simple and stable financial picture. Lenders want to see stable finances, not a reliance on short-term credit or an excessive amount of other financial commitments.
- Pay down balances - Aim to pay BNPL balances down to zero.
- Stop using BNPL - It is suggested that you stop using all Buy Now, Pay Later (BNPL) services for at least 12 months before applying for a mortgage.
- Be prepared to explain past BNPL usage and issues - If you have historical credit issues or have used BNPL, be ready to discuss this with your mortgage adviser or lender. Also, if you have used BNPL services, it is better if you can show it was for a specific, one-off, high-value purchase (like furniture) rather than for habitual, day-to-day spending like takeaways or groceries.
- Use a mortgage adviser - A professional mortgage adviser will have knowledge of how different lenders treat BNPL usage and be able to advise you on the best lender and mortgage product for your personal circumstances. At Money to the Masses we have partnered with Habito*, one of the first online mortgage brokers. Alternatively, you can find a mortgage broker that is local to you using the online professional directory service, VouchedFor*. VouchedFor lists financial professionals based on customer experience, locality and expertise.
For more information on how to improve your chances of getting a mortgage, beyond BNPL usage, read our article "How to get a mortgage – 7 tips to increase your chances".
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Habito, Vouchedfor
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