BUY NOW PAY LATER (BNPL) borrowers will benefit from stronger protections from 15 July, as the sector becomes regulated by the Financial Conduct Authority (FCA).
Mortgage brokers welcomed the regulation of the BNPL sector, as “people using BNPL often overlook the fact that they are borrowing money” — and say regulation will hopefully make BNPL users more selective as to how they use it.
Under the new regulation, lenders will be required to give BNPL borrowers important information, including the amount they’ll borrow, when they’ll need to make repayments, how much the repayments will be, the size of any penalties for paying late and their rights and protections.
They will also be required to carry out proportionate affordability checks to make sure customers can afford to repay what they borrow before offering BNPL products.
And if borrowers miss a repayment, lenders will need to contact them to let them know, explain what this means and provide them with the necessary support.
Brokers welcomed the upcoming regulation as they say lenders “take a strict view of BNPL usage” and warned many people aren’t fully aware that they are actually borrowing money when using BNPL.
BNPL
Darani Ganesharajah, Mortgage Broker at Springtide Capital, said that one of the biggest challenges is that many people do not view BNPL as a traditional credit commitment and do not understand that BNPL loans can have a significant impact on affordability assessments.
She added: “People using BNPL often overlook the fact that they are borrowing money, which can be a blow to their buying ambitions when it comes to applying for a mortgage. Hopefully, the sector being regulated will make people think more about what they are entering into and the risks involved.”
Ganesharajah cautioned that because the amounts being borrowed through BNPL facilities can be small, people often forget to mention them when applying for a mortgage, which can create problems in itself.
She continued: “Borrowers will sometimes forget to disclose them or simply not consider them relevant when discussing their finances. This can create issues later in the mortgage process when lenders identify the commitments through bank statements or credit checks.
“In some cases, it can lead to reduced borrowing capacity, declined Decisions in Principle, additional credit searches, requests for further documentation and delays to applications.
“From my perspective, greater regulation and transparency are likely to be positive. If consumers begin to view BNPL as a form of borrowing rather than simply a payment method, they may be more selective in how they use it.
“That should make affordability assessments more straightforward and reduce surprises during the mortgage application process, benefiting both borrowers and lenders.”
Overdue
Thomas Boughton, Founder at London-based Artillium Real Estate Finance, believes “changes to BNPL regulation are long overdue”.
He continued: “Consumers have increasingly been entering into largely unregulated, instant credit agreements without fully understanding the risks or long-term financial impact.
“From a mortgage underwriting perspective, lenders take a strict view of BNPL usage. Even when payments are maintained, BNPL commitments can indicate higher risk and impact affordability.
“From an advisory standpoint, we advise against any BNPL usage. It is often used for discretionary purchases such as clothing or footwear and frequent use can be a red flag in mortgage assessments.
“From a lender’s point of view, if you have to finance a pair of shoes, it probably isn’t the right time to look at mortgage options and that is the reality.
“Where short-term credit is required, traditional products such as credit cards that are managed and repaid in full monthly are generally viewed more favourably by lenders and are better at building a reliable credit history.”
Patterns
Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said that “mortgage lenders don’t usually treat BNPL as automatically bad, but they do look at the pattern. Occasional BNPL use that is repaid on time is very different from someone constantly splitting small everyday purchases because cash flow is tight”.
She continued: “Regulation should make BNPL cleaner and more transparent, but it won’t suddenly turn heavy usage into a positive credit signal. A lender is still going to ask: does this borrower rely on short-term credit to get through the month?
“Used sensibly, BNPL may become less suspicious because affordability checks and clearer terms should reduce some of the old ‘hidden debt’ problem.
“But extreme or frequent use can still hurt affordability, especially if payments are visible on bank statements or credit files. My view is simple: regulation is good for consumers, but borrowers should not confuse regulated with harmless.”
Stigma
Harry Goodliffe, Director at Winchester-based HTG Mortgages, agreed with Moustafa that usage patterns are important.
He said: “The issue has never really been Buy Now Pay Later itself, but how it’s used. Mortgage lenders are more concerned about patterns of borrowing than the product itself.
“Someone occasionally spreading the cost of a purchase is very different from someone relying on BNPL for everyday spending.
“The new regulation should improve consumer protections and could reduce some of the stigma around these products. Still, borrowers should not assume that frequent BNPL use will strengthen a mortgage application.”
Samuel Mather-Holgate, Managing Director and IFA at Swindon-based Mather and Murray Financial, also welcomed the upcoming regulation.
He added: “Without doubt, the new regime will make consumers more aware of what they are doing and the potential implications of it on their credit score.”
