Although occasional use of BNPL will not attract too much attention from lenders, frequent use is likely to be seen as a ‘red flag’ and many mortgage lenders have a strict stance on this.
The comments come as regulations come into effect on July 15 to provide stronger protections for those using BNPL.
This flexible payment method, where people can pay for their purchases interest-free, has become increasingly popular in recent years. UK financial data shows that 25% of UK adults will have used BNPL at least once in 2024, up from 14% in 2023.
Now the sector is coming under the supervision of the Financial Conduct Authority (FCA) and this means BNPL providers will be required to give borrowers advance information about how and when repayments are to be made, plus the amounts and extent of any late payment penalties.
Affordability checks will also take place to ensure customers can borrow the money to make future payments through BNPL.
The new regulations are being welcomed by mortgage brokers who fear that many people are currently unaware that they are actually borrowing money when they use BNPL.
That’s what Darani Ganesharajah, mortgage broker at Spring tide capitalspeaking to the Newspage Agency, said: “People using BNPL often overlook the fact that they are borrowing money, which can be a blow to their purchasing ambitions when it comes to applying for a mortgage.
“Hopefully the regulated sector will encourage people to think more about what they are getting into and the risks it entails.”
Ganesharajah explained that because the amounts borrowed through the BNPL facilities can be small, people often forget to mention them when applying for a mortgage, which in itself can cause problems.
“Borrowers will sometimes forget to disclose these or simply not find them relevant when discussing their finances,” she continued.
“This can cause problems later in the mortgage process when lenders identify commitments through bank statements or credit checks.
“In some cases, this may lead to reduced borrowing capacity, refused Decisions in Principle, additional credit inquiries, requests for further documentation and application delays.”
She thought more regulation and transparency would be positive. “If consumers start to view BNPL as a form of borrowing rather than just a payment method, they can become more selective in how they use it.
“This should make affordability assessment easier and reduce surprises during the mortgage application process, benefiting both borrowers and lenders.”
Meanwhile, Thomas Boughton, founder of London-based Artillium Real Estate Financewho also spoke to Newspage said his company was advising customers against using BNPL. He feared that many people did not understand the risks and long-term financial consequences.
“From a mortgage underwriting perspective,” he said, “lenders have a strict view on the use of BNPLs. Even if payments are maintained, BNPL commitments may indicate higher risk and a greater impact on affordability.
“From an advisory point of view we would advise against any use of BNPL. It is often used for discretionary purchases such as clothing or shoes and frequent use can be a red flag for mortgage assessments.
“From a lender’s perspective, if you need to finance a pair of shoes, this is probably not the right time to be looking at mortgage options, and that’s the reality.”
He said more traditional forms of payments, such as credit cards, which are managed and repaid monthly, are viewed more favorably by lenders and are better at building a more reliable credit history.
Nouran Moustafa, practice director and IFA at Roxton wealthtold Newspage that lenders are looking for patterns and that occasional use of BNPLs will not be a concern, but that extreme use “could harm affordability.”
She hoped the regulations would make potential mortgage applicants more complacent about using BNPL.
“Regulation should make BNPL cleaner and more transparent, but it won’t suddenly turn heavy usage into a positive credit signal. A lender will still ask: Is this borrower dependent on short-term credit to get through the month?”
She added: “My view is simple: regulation is good for consumers, but borrowers should not confuse regulated with harmless.”