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Income tax relief on buy to let mortgage interest is being restricted but is it more tax efficient and financially better all round to operate your portfolio using a limited company? Buy to let expert Gavin Richardson compares the options.

How does a BNPL scheme work? 

‘Buy now, pay later’ works by spreading the cost of a purchase over a prolonged period without incurring interest. Having the option to pay later helps customers avoid dipping into their overdrafts, and unlike store or credit cards, there are no extra charges or fees attached. The schemes are typically almost instant to set up, meaning that those in desperate need of extra time can access this easily.

Will BNPL affect my credit score? 

It’s important to be aware that these schemes can impact your credit score. Three ways that you could be impacted by a ‘buy now, pay later’ are:

  1. Increase in personal debt

Products such as Klarna and Clearpay are heavily marketed at the checkout, encouraging people to choose a BNPL rather than pay as usual. The ease of accessing this type of scheme means that customers can get caught up and fall into debt.

  1. Missing payments

Unlike a credit card, the usual repayment period for this type of scheme is shorter, just six weeks in some instances. You are also at risk of incurring a fee for paying late, and debt collection agencies could get involved should your charges add up. These types of missed payments could end up negatively affecting your credit score.

  1. Hard searches for credit against your file.

A lender will look at your credit report for both soft and hard searches. Whilst soft searches don’t raise concern, too many hard searches can make you seem heavily reliant on credit and borrowing, causing lenders to worry about your application.

How do lenders deal with BNPL? 

During the underwriting process, lenders will undertake a hard credit check against you in order to ensure that you can afford the mortgage you have applied for. Some BNPL schemes will appear on your credit report and bank statements, but others will not.

Lenders will be looking for this type of interest-free borrowing, even if you haven’t had to pay for your purchases. This means that regardless of your credit report, lenders will eventually find out whether you have recently used a scheme.

What does BNPL mean for my mortgage application? 

Whether using a ‘buy now, pay later’ will affect your mortgage application will depend on three factors:

  1. Your monthly repayments
  2. The outstanding loan amounts
  3. When you can repay the full amount

If a lender concludes from your application that you have used too much short-term credit, this can negatively impact your mortgage. Not only could it slow down the entire process, but the lender could decide to lessen their offer to mitigate some risk. If your credit score is at a poor level, the lender could reject your whole application.

However, it is important to note that a BNPL on its own is not typically enough to derail your mortgage application completely. Lenders like to have an overview of your entire financial situation before deciding.

How to improve your chances of securing your mortgage deal

Whilst a BNPL may not necessarily impact your application, it could slow the process down and affect your ability to borrow from a lender. This is because each lender will have a different approach to DIP forms, and therefore any debt will inevitably be discovered at some point throughout the process. As such, here are some top tips to improve your chances of securing your mortgage deal.

Manage your BNPL borrowing

If possible, make sure to pay off your debts ahead of your mortgage application. Furthermore, we recommend that you avoid taking out any further BNPL or other credit agreements throughout the application process. Lenders may be put off by any sudden new loans that come up whilst you are applying for a mortgage.

Repay on time

Keeping on top of your debt can prove to lenders that you can repay loans on time, whether this is your BNPL, or your overdraft, loans, credit cards, etc. Missed or unpaid payments will cause lenders to panic and could mean they reject mortgage application.

Be upfront with your broker

A whole-of-market broker can assess your exact mortgage needs and find you a deal that suits what you are looking for and your credit rating and score. If you are upfront ahead of time, there is an increased chance of finding a suitable lender and receiving approval on your application.

Home Mortgages vs Buy to Let Mortgages

Unsettled BNPL schemes will have a more significant impact if you’re trying to purchase or remortgage your primary residence, as affordability is based solely on your income and outgoings. However, while buy to let mortgage applications are based primarily on whether rental income meets affordability requirements, applicants with poor credit scores may struggle to access the competitive interest rates and mortgage products they want. If you're concerned, an experienced mortgage broker will be able to give you an idea of whether your current credit score will negatively impact your chances of accessing the mortgage you want.

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