Mortgages are a hot topic! There is so much information on credit, fees, and spending history that all tend to tie back to how it may affect your ability to take out a mortgage.
So here we are, welcome to the latest edition of our ‘questions on your lips’ series, where we discuss some of the burning questions our wonderful Klarna community have been asking. This week we’ll be looking at mortgages and whether using BNPL services like Klarna can impact your chances of getting approved for one.
First things first, how do mortgage applications work?
Buying a property is a life milestone and once you’ve found the dream home, most of us will need to get a mortgage alongside it. There are several steps to getting a mortgage approved, and part of the process is to supply essential documents to your potential mortgage lender. The documents usually include proof of income and outgoings, recent payslips and bank statements, and details of all earnings so the lender can conduct affordability checks to see if you’re able to meet the potential mortgage repayments. The lender also performs a credit check to gauge how likely you are to reliably make repayments based on your financial history visible from your credit file.
So does Klarna impact my credit score?
Klarna has three credit products in the UK – our two ‘Buy Now Pay Later’ (BNPL) products (Pay in 3 and Pay in 30 days), and thirdly, a longer-term financing option. On our BNPL products, we conduct eligibility assessments on each purchase, including a soft credit check. These checks are only visible to Klarna and you, never to other lenders. Therefore, our BNPL products do not affect your credit score.
We only perform a ‘hard credit check’ for our more traditional ‘financing’ product (6-36 months), which is made clear as you go through the sign-up process. You can find more information about credit scores and Klarna here.
Does Klarna show up on my bank statements?
Using any Klarna product will show up as a transaction on your regular bank statements, in the same way going to a cafe, restaurant, shopping online or any other purchase you make will. When applying for a mortgage, lenders may request bank statements to assess affordability and check your spending history. When lenders see that a certain amount of spending is coming out of a third-party payment service (e.g. PayPal, Monzo and Klarna), they might want to understand how you spend your money.
For example, if you spend £100 on an ASOS purchase, it will show up in your bank statement. If you pay the same £100 on ASOS via a third-party platform, such as Klarna, in your bank statement it will show up as £100 at Klarna.
What does this mean to the mortgage lender?
Because Klarna’s BNPL services do not impact or show up in your credit history, it does not affect your credit score in any way. However, mortgage lenders will want to understand your entire spending history and to do so; they may also review your spending history at Klarna and other BNPL providers.
This is not a problem for most mortgage lenders, and they gauge your entire spending history this way. Recently, a small number of customers have reported that their mortgage applications have been questioned because Klarna appears on their bank statement. We believe this is because there is a misunderstanding about how BNPL works. BNPL is fundamentally different to a credit card because it is not a long term debt accruing fees and interest so we don’t believe customers should be penalised for using these services.
Although not a concern to most lenders, we want to ensure that this issue never occurs for the people who use Klarna and that all lenders understand that our BNPL products offer short term credit, paid off either immediately or up to 60 days after – long before the mortgage application will complete. Klarna is committed to engaging with all mortgage lenders and brokers to help educate them on how our products work and why people choose Klarna to help them manage their finances. This way, mortgage lenders can accurately incorporate Klarna and other BNPL usage within any affordability checks they deem necessary.
One thing to note is if you use multiple providers to make sure you read all the terms and conditions of BNPL providers because although Klarna does not show on your credit file or charge interest or late fees, other providers might.
To help, we spoke to Sabrina Hall at Kind Financial Services to get some advice on applying for a mortgage if you regularly use BNPL products:
- Whilst some BNPL options, such as Klarna don’t show on your credit file, others do. If they show on your credit file, the lender will consider them for affordability purposes unless it’s clearly indicated on the application form that they will be repaid.
- A small minority of lenders don’t understand how BNPL schemes work and whilst that shouldn’t limit your options; it is vital to use an adviser to help you navigate those lenders by either avoiding them or putting a case forward in explaining how these products are used.
- Ensure that all payments are made on time to avoid any late payments showing on your credit file and potential late fees charged by your BNPL provider (Klarna does not show on your credit file, charge fees or interest on its BNPL products.)
- Think about your budget, and track the amounts you are due to repay. It might be tricky to budget if you are using multiple schemes for various internet shops, and you get a shock if a few payments overlap in one month, making your expenditure exceed your income for that month.
That’s all for this week folks! We’ll be back soon with another installment of ‘the questions on your lips’.