Breaking out of mortgage prison: can easing serviceability buffers help?

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Have you been keen to refinance but told you can’t? You’re not alone. Many Australian households are currently locked into their home loans due to rising interest rates. But some banks have recently started to lower their serviceability thresholds. 

As interest rates have climbed, Australians have refinanced in unprecedented numbers.

In fact, a record high of $21.3 billion in refinancing took place in March 2023, according to ABS statistics – 14.2% higher compared to a year ago.

But some people are now unable to refinance and take advantage of potential savings because they don’t meet lender requirements.

They’re locked into what’s called “mortgage prison”.

What’s mortgage prison?

You see, prudential regulator APRA has guidance in place that requires lenders to stress-test all new mortgage applications at 3% above the interest rate the borrower applies for – even when refinancing.

And since the RBA’s official cash rate has increased from 0.10% to 4.10% in just 13 short months, many mortgage holders are now unable to refinance because they can no longer meet the 3% mortgage serviceability buffer.

But, there is an “exceptions to policy” in APRA’s guidance that states lenders can override the 3% buffer for exceptional or complex credit applications, if done prudently and on a case-by-case basis.

So recently some big players – including Westpac and Commonwealth Bank (CBA) – reduced their refinancing serviceability buffers to as low as 1%, if borrowers meet certain circumstances (more on that below).

Other smaller lenders are making similar moves, including Westpac subsidiaries St George, Bank of Melbourne and BankSA.

Many in the industry hope this will reduce mortgage stress and defaulted loans, given the current financial climate of rising rates and inflation.

What are the eligibility requirements?

They differ from lender to lender.

But for CBA you’ll need to have a loan-to-value ratio of at least 80%, a squeaky clean record of meeting all your debt repayments over the past year, and be refinancing to a principal and interest loan of a similar or lower value.

You’ll need to meet the 1% mortgage serviceability buffer, too.

For Westpac’s new “streamlined refinance”, you must have a credit score of more than 650.

You’ll also need a good track record of paying down all existing debts over the past 12 months, be refinancing to a loan that has lower monthly repayments than your existing one, and meet the 1% buffer test too, of course.

What’s the catch?

Ok, so under CBA’s new policy, for example, borrowers must extend their loan term out to 30 years.

Obviously this can cost you quite a lot in interest over the long run.

For example, RateCity research shows that if you took out a $500,000 loan with a Big Four bank three years ago, and if you applied for CBA’s refinancing offer today, your mortgage repayments could drop by as much as $235 a month.

But over the long run, you could pay up to an extra $32,117 in interest because you’d be extending your loan by an additional three years.

So while this option could help alleviate some financial stress now, you may have to pay for it over the long run – there’s a bit to weigh up.

Are the recent serviceability changes right for you?

Give us a call today to find out more about refinancing and successfully navigating serviceability thresholds.

We can guide you on ways to improve your chances of refinancing success and help you escape “mortgage prison”.

Just call us !

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

What happens when you roll off your fixed-rate mortgage?

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They say all good things come to an end, and that includes your ultra-low fixed-rate home loan period. So what can you do to ensure a smooth transition?

With the past couple of years offering historically low interest rates, many Australians have been able to lock in an ultra-low fixed-rate home loan.

In fact, in July 2021, a whopping 46% of home loans taken out that month were fixed, which the ABS says was the peak period for fixing.

That means the peak time for borrowers rolling off their fixed-rate period will be between July and December 2023, according to RBA research.

And that time is fast approaching.

A looming fixed-rate cut off date can be daunting, particularly in the face of recent interest rate hikes. But you do have a few different options available, namely the three Rs: reverting, refixing and refinancing.

Reverting

If your fixed period ends and you haven’t made other arrangements, typically your loan will revert to the standard variable interest rate.

And this is set to give many home owners around the country a bit of a rude shock if they don’t start planning ahead.

In fact, RBA deputy governor Michele Bullock has warned that half of fixed-rate loans may face an increase in repayments of at least 40% when they roll straight onto a variable mortgage rate around mid-2023.

So before your fixed period ends, get in touch with us and we’ll help you explore your options.

Refixing

Depending on the terms and conditions of your mortgage, you may be able to refix your loan with your existing lender.

It’s worth noting though, that due to the official cash rate going up dramatically over the past few months, it’s unlikely that you’ll be put on a fixed rate similar to the one you’re currently on.

Other lenders might be willing to offer you a better rate – be it fixed or variable – than your current lender, which brings us to refinancing…

Refinancing

If your current lender doesn’t offer you an attractive retention interest rate, refinancing your loan to a new lender could potentially score you a better deal.

Rising interest rates have brought on record levels in refinancing. In fact, more owner-occupiers refinanced in June than ever before, according to ABS data.

This means the home loan market is highly competitive right now and lenders are keen for borrowers who have a good amount of equity and are on top of repayments.

How to start preparing now

If you’re coming off a fixed-rate loan in the near future, there are other steps you can also take to smooth the transition.

First and foremost, start planning ahead now. That includes building up a buffer of savings to cover higher repayments each month and if things are looking tight, cutting back any unnecessary expenses.

Last but not least, get in touch with us well in advance of your fixed rate ending.   We have plenty of time to model different options for you – whether that’s reverting, refixing or refinancing.    Just call us   ….

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Why you might want to refinance sooner rather than later

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Thinking about refinancing? As interest rates rise, so do the hurdles you need to clear. 

When was the last time you refinanced?

If the answer is “never”, or you can’t actually remember, there’s a good chance you’re paying a higher interest rate than you could be due to the “loyalty tax”.

You see, the banks don’t think you’re paying attention, and as such, they only offer their lowest rates to new customers in a bid to win them over – as proven by the RBA.

In fact, a recent RateCity analysis found that customers who stay loyal to their bank could be hit with an extra $5,101 in interest over the next three years alone (based on a $500,000 loan taken out with CBA in 2019).

For a $750,000 loan that would be an extra $7,652 in interest, and for a $1 million loan it’s $10,202 extra.

This is a big reason why owner-occupier refinancing across the country rose 9.7% in June to a new record high of $12.7 billion, according to the Australian Bureau of Statistics.

Great. But why is refinancing now so important?

Ok, so when you refinance, your new lender must assess something called your “home loan serviceability”.

Basically, that’s your ability to meet your home loan repayments at an interest rate that’s at least 3% above the rate you’re being offered.

And as you might have seen on the news, the big four banks are tipping the RBA’s official cash rate to increase from 1.85% in August to anywhere between 2.60% (Commbank forecast) and 3.35% (ANZ forecast) by November.

That means as interest rates go up, so too will the hurdle you’ll need to clear for home loan serviceability when refinancing.

All in all, that means the sooner you refinance, the lower the hurdle you’ll need to clear to ensure you’re not stuck with your current rate and lender.

How to explore your refinancing options

This is the easy bit! Simply get in touch today and we’ll help you get the ball rolling.

And even if you don’t want to refinance with another lender, there’s always the option of asking your current lender to review your rate, indicating that you’re prepared to refinance if they don’t come to the table.

So if you’d like to find out more about what options are available to you,    just call us  ….

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Banks tighten lending, reducing the maximum you can borrow

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Some of Australia’s biggest banks have tightened their mortgage lending criteria, meaning you might not be able to borrow as much from them. How might this affect your next purchase?

This week ANZ lowered a key lending cap, indicating it will no longer lend to borrowers with a debt-to-income (DTI) ratio above 7.5 (meaning people can borrow up to seven and a half times their gross annual income).

NAB meanwhile has reduced its cap to eight times a borrower’s income.

Up until this month, both banks had been willing to lend up to nine times a borrower’s income.

In effect, the changes mean the maximum amount you can borrow with them to buy a property will be reduced.

Fellow big four banks CBA and Westpac have not announced any reductions but have said they’re already applying tighter lending rules to borrowers seeking loans with high DTI ratios.

Why are banks tightening lending?

The increased focus on lending caps comes as financial institutions and the industry regulator, the Australian Prudential Regulation Authority (APRA), prepare for the impact of higher interest rates (many economists are tipping another rate hike in June).

APRA started making moves as early as late last year when it announced new borrowers would need to be tested to see if they could cope with interest rates at least 3% above the current rate (up from 2.5% previously).

Then, this week APRA Chair Wayne Byers indicated the regulator was concerned about the rise in high DTI loans being issued by some banks.

“We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year,” he told the AFR Banking Summit in Sydney.

“Interestingly, this growth has not been an industry-wide development, but rather has been concentrated in just a few banks.”

So how do DTI ratios work?

Your DTI ratio is very simple to work out.

The formula is: total debt / gross income = debt-to-income ratio.

So, if you’re seeking a $700,000 home loan (and have no other debt), and you have $160,000 in gross household income, your DTI is 4.375 – a ratio most lenders would be very comfortable with.

However, a household in the same financial position seeking to borrow $1.4 million for a home would have a DTI of 8.75, putting it above the caps now being imposed by ANZ and NAB.

So how much can you safely afford to borrow?

There’s a fine line between maximising your investment opportunities and stretching yourself beyond your limits, especially with interest rates on the rise.

It’s not only important to stress-test what you can borrow in the current financial landscape, but also against any upcoming headwinds that are tipped to hit borrowers – such as multiple interest rate rises.

So, if you’d like to find out your borrowing capacity and options, get in touch today. We’d love to sit down with you and help you map out a plan.  Just call us   …..

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

What’s your debt-to-income ratio? And why do lenders care about it?

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New data from the lending watchdog reveals almost one in four new mortgages are risky. How are they deemed risky? Well, it’s got something to do with your debt-to-income ratio, which we’ll explain in this week’s article.

Your debt-to-income (DTI) ratio might sound complicated, but it’s really very simple to work out.

Basically, your DTI is a measurement used by lenders that compares your total debt to your gross household income.

The formula is: total debt / gross income = debt-to-income ratio.

So if you’re seeking a $700,000 home loan (and have no other debt), and you have $160,000 in gross household income, your DTI is 4.375 – a ratio most lenders would be very comfortable with.

So why do lenders care about your DTI?

Well, December quarter data just released by the Australian Prudential Regulation Authority (APRA) shows 24.4% of new mortgages have a DTI ratio of 6 or higher.

At the 6+ ratio, APRA (aka the banking watchdog) deems these loans as risky.

And they’re keen to see the percentage of these loans that lenders approve start to come down.

That’s because they’ve been steadily on the rise for a while now.

In the September 2021 quarter, for example, new mortgages with a DTI of 6 or higher were at 23.8%, while in the December 2020 quarter it was at just 17.3%.

“However, the rate of growth in the [most recent] quarter slowed,” APRA points out (probably with a sigh of relief) in their latest release.

So why has the percentage of risky loans recently risen?

The recent rise in high DTIs has most likely got a lot to do with the phenomenal price growth (and resulting FOMO!) we’ve seen across the country over the past 12-18 months.

In fact, new data released by the Australian Bureau of Statistics shows that in the 12 months to December 2021, residential property prices rose 23.7% – the strongest annual growth ever recorded.

The mean price of residential dwellings in Australia now stands at $920,100.

That’s a jump of $44,000 from the September quarter ($876,100), and a jump of $176,000 in 12 months from the December 2020 quarter ($744,000).

So with property prices increasing at such a sharp rate, and people stretching themselves to their limits to buy into the market, it has resulted in upwards pressure on high DTI percentages.

The good news is that as the property market starts to cool, so too should the growth rate of risky DTIs, which is what APRA alluded to above.

So how much can you safely afford to borrow?

There’s a fine line between maximising your investment opportunities and stretching yourself beyond your limits.

Especially so as RBA Governor Dr Philip Lowe this week warned Australians to start preparing for higher interest rates.

And that’s where we come in.

It’s not only important to stress-test what you can borrow in the current financial landscape, but also against any upcoming headwinds that are tipped to hit borrowers – such as interest rate rises and possible tightening lending standards.

But hey! Everyone’s financial situation is different. Some lenders will take into account your particular circumstances and accept a loan application where a DTI is higher than 6.

So if you’d like to find out your borrowing capacity and options, get in touch today. We’d love to sit down with you and help you map out a plan.

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Open banking is ramping up, so how are lenders using your data?

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Open banking is here so just how are lenders and fintechs using your shared data?

A new report has shed some interesting insights.

With all that’s gone on over the past two years, one of the nation’s biggest banking overhauls in recent memory has slipped under the radar.

It’s called ‘open banking’, and it aims to allow you to easily and securely share your banking data with your bank’s competitors to make it more convenient for you to switch banks when you think you’ve found a better deal on a financial product.

For example, instead of spending hours and hours gathering documentation (such as bank statements, expenses, earnings and identification documents) to refinance your home loan, you could simply request that your current bank sends the info across for you.

But, like most things, it comes with a trade-off: you’ve got to share your banking data with the prospective lender, fintech or allied professional to make it happen.

So just how do they use your data?

Australian open banking provider Frollo has just published the second edition of its yearly industry report, The State of Open Banking 2021, which surveyed 131 professionals representing banks and lenders, fintechs, technology providers, and brokers across the country.

The report shows open banking data availability has accelerated dramatically.

In the first 10 months of 2021, 70 banks started sharing consumer data and 14 businesses became accredited data recipients – including three of the four big banks.

This is an increase from just five data holders and five data recipients in 2020.

And more financial institutions are getting ready to jump on board.

The industry survey shows 62% of respondents plan to use open banking data within the next 12 months, and 38% within the next 6 months.

So what are they using the open banking data for?

Well, the most popular uses can be grouped into three categories:

– Lending: income and expense verification is highly valued by 59% of survey respondents.

– Money management: multi-bank aggregation and personal finance management were highly valued by 50% of respondents.

– Verification: customer onboarding (49%), identity verification (38%), account verification (34%) and balance checks (30%) were all highly valued.

What’s in it for you ?

Open banking makes it easier to move lenders and that’s where we can help you.

We’ll review your current loans and offer a simplified loan approval process.

We have the high tech, high touch loan solution for you with rates you will rate !

So if you’d like to explore your options, get in touch today.     Just call us

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

4 in 5 hopeful buyers don’t understand key financial concepts

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While most Australians dream of owning their own home, the majority of hopeful homeowners admit they don’t fully understand how home loans or mortgage rates work. That’s why we make it our mission to enlighten you during your home buying journey.

They say knowledge is power.

But this week we stumbled across some interesting stats from UBank’s Know Your Numbers survey.

It found that 84% of Australians who are yet to buy a property admit they don’t know enough about how home loans, mortgage rates and deposits work.   And  while 3 in 10 admitted to knowing nothing at all and having no idea where to start.

But if you start by jumping at the first seemingly attractive rate you see advertised, well, that can lead to big problems down the track.

“Entering the property market with little to no knowledge of some essential financial terms and concepts could see Australians falling into common traps or getting themselves into situations they cannot manage,” explains UBank CEO, Philippa Watson.

How we help demystify finance for you

Now, the purpose of this article isn’t to shame anyone who hasn’t already done their homework. Far from it.

Rather, we want to reassure you that when you come to us for a finance solution, we’ll be sure to explain any financial terms or products you don’t fully have your head around yet.

And that’s one of the key differences between us and the big banks.

We’re not just satisfied with matching you up with a home loan, we want you to be confident that it’s the right one for you, and for you to understand the reasons why.

Some of the most common financial terms we explain to our clients

There’s no denying the world of finance is full of jargon and seemingly complicated language.

To help get you started, below are some of the most common financial terms people ask us about.

Loan to Value Ratio (LVR): LVR is the percentage of the property’s value (as assessed by the lender) that your loan equates to.

For example, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is worth 80% of the property value, making your LVR 80%.

Lenders Mortgage Insurance (LMI): LMI is insurance that protects the bank or lender in case you can’t pay your residential mortgage.

It’s usually paid by borrowers who have an LVR higher than 80% – that is, borrowers with a deposit of less than 20%.

Offset account: an offset account is just like a regular transaction account, except it’s linked to your home loan. The money held in the account is counted as if it’s been paid off your home loan, which reduces the balance of the loan and in turn, reduces the interest you need to pay.

And because the offset account acts like a regular transaction account, the money you’ve put in there is still accessible whenever you need it.

Refinancing: refinancing is the process of switching your home loan to take advantage of another, more suitable home loan for your present circumstances, such as one with a lower interest rate that might save you money.

Got any other finance terms you’d like explained?

If you’re keen to buy your first home but find all the terminology a bit daunting, then please reach out to us today.

We’re always happy to sit down and demystify the home buying process, so that when you do take the leap into ownership, you can be confident that you’re armed with all the knowledge you need.   Just call us.

 

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

COVID-19 repayment amnesty over: how to avoid a bad credit rating

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The COVID-19 loan deferral program and credit reporting amnesty is now over, which means banks will report any late repayments on mortgage or small business loans to credit agencies unless you’ve entered into a hardship arrangement.

The banks’ mortgage deferral program and subsequent credit score reporting amnesty officially ended on April 1.

The package was created during the peak of COVID-19 to provide loan repayment relief for almost one million home and business loan borrowers facing financial hardship.

Luckily, many people have since been able to resume their repayments – as of late February, just 2,803 small business loans (1.2%) and 22,480 housing loans (5%) were still deferred, figures show.

But, we’re not out of the woods yet.

The JobKeeper wage subsidy scheme has also just officially ended, which has the potential to put tens of thousands of households and businesses at risk once more.

If you think you might be impacted by JobKeeper, read on

Latest reports indicate up to 150,000 workers could lose their jobs this month due to JobKeeper ending.

If your ability to repay your home or small business loan might be affected in the months ahead, then it’s important to act now, rather than wait until after you’ve missed a repayment.

That’s because by then it could be too late and it might end up on your credit file.

Your most appropriate course of action, however, will depend on your individual circumstances, which we’ve broken up into two categories below.

Category 1: Repayments will be tight, but possibly doable

If your upcoming loan repayments are looking tight, but possibly doable, then get in touch with us today to discuss some financing options that might make your repayments more manageable.

These options might include:

– switching to interest-only repayments for a period of time,
– renegotiating your rate with your current lender,
– refinancing to another lender,
– debt consolidation, or
– a combination of these and other measures.

Category 2: You don’t think you’ll be able to make your repayments

If you’ve lost your job due to JobKeeper ending, for example, and the chances of making your repayments are looking a little grim, then it’s important to get in touch with your bank today to discuss entering into a hardship arrangement.

Not only will this potentially give you some breathing space on your repayments, but it will help keep any missed payments off your credit file, as the Australian Banking Association states below:

“For customers that enter into another form of hardship or forbearance arrangement with their bank, banks will not report the repayment history information. Instead, they will leave the field blank for the duration of the arrangement.”

 

If you’d like to discuss any of the above in further detail please don’t hesitate to get in touch today – we’re here to help any way we can.

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

How do you compare: how much of your pay goes to your mortgage?

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The property market is going through a boom phase, which means housing affordability is getting tougher. So how much does the average Australian household need to put towards their monthly home loan repayments in the current market? Let’s take a look.

You’ve probably noticed the housing market is going a bit crazy at the moment.

FOMO has taken hold and many properties across the country are selling well above their reserve.

As such, housing affordability has deteriorated, says Moody’s Investor Service, reversing the improving trend seen in 2020 during the peak of the coronavirus crisis.

So what percentage of a pay cheque goes towards a typical home loan?

On average, two-income households need to put aside a quarter (24.6%) of their monthly income to meet repayments on a new home loan, as of February 2021.

That’s up from 22.7% in June and July 2020, when new mortgages were the most affordable they’ve been in a decade.

The deterioration in housing affordability was evident in all capital cities over the five months to February 2021, with Perth remaining the most affordable and Sydney the least.

That said, housing affordability still remains better than the ten-year average of 26.1% and well under its peak of 30.7% in April 2011.

That’s because the average mortgage interest rate has nearly halved to 3.65% since 2011, according to Moody’s.

Want to know how much you can borrow?

Got your eye on a new property and want to know if you can get a loan for it?

Get in touch today and we’ll help you crunch the numbers, work out your borrowing capacity, and discuss your finance options.

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Be careful of loading up on ‘buy now, pay later’ purchases this Xmas

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‘Tis the season to be jolly, but it’s important not to get carried away when using ‘buy now, pay later’ providers to fund that festive spirit. That’s because one-in-five users struggle to make their repayments, new research has found.

 

“Christmas is a time for giving” – it’s a line that’s been drummed into us since we popped our first piece of chocolate out of an advent calendar.

But it’s important not to go overboard and spend more than you can afford to pay back if you use ‘buy now, pay later‘ services such as Afterpay and Zip Pay.

That’s because a new report from ASIC shows one-in-five users were late paying their other bills, including home loan repayments, as a result of using the services.

Below we’ll discuss why it’s important to budget properly if you plan on using a ‘buy now, pay later’ service this festive season.

But first, what are ‘buy now, pay later’ services?

‘Buy now, pay later’ arrangements allow you to buy goods and services immediately, and repay the amount over a series of instalments.

If you make a purchase using market leader Afterpay, for example, you’ll pay your first instalment at the time of purchase, and then the remaining three instalments over the next three fortnights.

If you pay on time, there’s no fee for you (that’s charged to the merchant). However, if you’re late to make a repayment, you’ll cop a small fee (usually $10).

On the face of it, it’s a pretty good arrangement. And don’t get us wrong – these are perfectly legitimate companies.

But where you can run into financial trouble is using several ‘buy now, pay later’ services without a plan to pay the money back over the coming fortnights, especially over the holiday season when your focus doesn’t tend to be on the household budget.

One-in-five consumers miss paying other bills on time

As mentioned earlier, 20% of ‘buy now, pay later’ users miss or are late to pay other bills in order to make their ‘buy now, pay later’ payments on time.

The bills most commonly affected are household bills (44%), credit card payments (32%), and, worryingly, home loan repayments (22%).

“[Some consumers] are experiencing financial hardship, such as cutting back on or going without essentials (e.g. meals) or taking out additional loans, in order to make their ‘buy now, pay later’ payments on time,” the ASIC report says.

Some final considerations

Look, we’re certainly not trying to play Grinch this Christmas.

But with many families doing it tough right now, it’s important not to take on any debt that you can’t afford to comfortably pay back – no matter how straight forward and low risk it might seem.

It’s also worth noting that while the Afterpay approval process doesn’t (generally) involve credit report checks, Afterpay (and its competitors such as Zip Pay) is still a credit liability that needs to be disclosed when applying for a home loan.

So if you have any doubts about whether a ‘buy now, pay later’ purchase might affect your ability to secure a home loan – or pay off your existing one – then feel free to get in touch.

We’re happy to chat in more detail to help you make this Christmas more jolly, and less folly.   Just talk to us.

 

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