Can Afterpay affect a home loan application?

• Using Afterpay and concerned it may affect a home loan decision?
• Find out how banks and brokers will consider Afterpay in your HEM (Household Expenditure Measure) calculation.
• Learn what they report to credit reporting bureaus and in what ways they could impact your application.

Afterpay’s buy now pay later service is all fun and games until your home loan application gets rejected.

So can your lifestyle impact your ability to borrow funds? Can shopping with Afterpay affect a home loan decision? Let’s find out.

What do banks look for?

Applying for a home loan is a multifaceted process in which lenders look at a number of factors before deciding whether or not to lend you money.

There are three crucial aspects to consider if you want to move up the property ladder.

Your credit score

Banks use your credit score to evaluate the potential risks posed by lending you money. It is a key factor when applying for a home loan, one that can make or break the deal. Lenders can use it to determine whether you qualify for a loan, and if you do, it can affect the interest rate you are eligible for.

Your credit score is calculated by Australia's main credit reporting agencies: illion, Equifax, and Experian. Although different agencies may calculate your score in different ways, the higher your score is, the more likely you are to have your home loan application approved.

Your income

Your income determines your loan affordability, with the proof of income typically including two to three months of payslips. Most lenders will also consider your savings and other assets, such as a car or other properties you might own.

Your expenses

Whilst each lender has its own rules, you may be asked to present a list of all your monthly expenses, including how much you typically spend on essentials like groceries, utilities, debt repayments, and school fees. Details of lifestyle spending such as streaming services or buy now pay later services may also be requested. To assess your loan affordability, most banks will ask for three to six months’ worth of bank statements.

What effect does Afterpay have on your credit score?

According to Afterpay, the service does not affect your credit score. The company has recently changed its credit reporting policy, and, quoting from their website, they “never do credit checks or report late payments”.

However, this doesn’t mean Afterpay can’t affect the outcome of your home loan application.

Even though Afterpay doesn’t report late payments, you can’t hide any Afterpay debt from potential lenders since they will ask for copies of bank statements that will include any Afterpay repayments.

As well as establishing what you owe, lenders can also check your repayment history when assessing your application as any late payment fees charged by Afterpay will be present on your statements. In other words, even though Afterpay don’t report late payments to credit bureaus, lenders can still see them.

Missed or late Afterpay payments can affect your credibility, and the way you pay back your debt can also impact your ability to borrow. For instance, if you’re using a credit card to pay back your Afterpay debt, banks may consider that a risky sign you can’t manage your funds properly.

Afterpay repayments in HEM calculations

When applying for a home loan, you might be tempted to hide any unnecessary expenses. However, you won’t be able to hide what you spend with Afterpay. Because the Afterpay account is linked to your card – and, ultimately, to your bank account – everything you spend through them will appear on your statements. Mortgage brokers and banks will see your Afterpay expenses. Thus, any purchases made with Afterpay will affect your HEM (Household Expenditure Measure) calculation, based on data for typical households provided by the Australian Bureau of Statistics.

Should you close your Afterpay account before applying for a home loan?

Considering that Afterpay doesn’t affect your credit rating and that all payments to your Afterpay account will appear on your bank statement, you don’t necessarily have to close your Afterpay account before applying for a home loan.

What you should consider, however, is repay at once any Afterpay debt that’s overdue, and then spend responsibly. If you want to increase your chances of being approved for a home loan, avoid late payments and use a debit card (rather than a credit card) to fund your Afterpay account.

Showing a potential lender that you can manage your money responsibly and that you always pay on time is more important than trying to hide your Afterpay account.

If your home loan application was on a knife's edge and keeping your Afterpay account open meant your home loan borrowing capacity was restricted then you might want to close it down.

At the end of the day, having a lender find out that you’ve hidden irresponsible activity will increase the likelihood of your application being declined.