The array of short-term and high-interest consumer credit products has ballooned in recent years, and those who use them may find it harder to get a mortgage.

Payday loans and guarantor loans have been heavily marketed for around a decade and, over the past few years, buy now, pay later (BNPL) loans from giants such as Klarna have burst onto the scene, promoted by the likes of Lady Gaga, other celebrities and social media influencers.

In the past year or so, salary advance schemes have also sprung up, such as the one launched by fintech firm Revolut in August. These are in their infancy so are yet to permeate the mortgage market like the other products mentioned.

It is important to keep tabs on how lenders judge eligibility, particularly as BNPL increases

Some of these loans can be easy to obtain via slick apps or from retailers at their online or physical checkouts.

While few lenders explicitly rule out borrowers who have taken one of these products, the presence of such loans on bank statements or credit reports can raise a red flag as an indicator of indebtedness.

Mortgage lenders may therefore add an extra layer of scrutiny that may uncover some gremlins. Even if it does not reveal major problems, if nothing else the process can make the case a more complex one.

Asked how Lloyds Banking Group treats borrowers who have BNPL, guarantor or payday loans in their history, a spokesperson for the UK’s largest lender says: “We make decisions based on a full understanding of customers’ circumstances and take into account a range of factors, including any regular debt repayments, to ensure affordability of mortgage repayments.”

The bank does not explicitly rule out applications from such borrowers but it may probe further.

Payday loans

The loan that often creates the most problems for mortgage clients is the payday loan. Although not as prevalent as at the start of the previous decade when the now defunct Wonga was a household name, it is still widely available.

While recent data is hard to come by, figures from the Financial Conduct Authority showed there were just over 5.4 million high-cost, short-term credit loans (mostly payday loans) taken out in the year to June 2018, albeit this is roughly half the estimated 10 million in 2013 before FCA regulation came about.

For those who have had a recent payday loan, Trinity Financial product and communications director Aaron Strutt says: “Payday loans have never been popular with lenders and most still do not like them. Generally, the attitude is that, if you need to take a payday loan, you probably should not be getting a mortgage.”

Mojo Mortgages director of mortgages Cassie Stephenson adds: “Taking out a payday loan was not a problem for many lenders a few years ago, but if people take one out now it is likely they will need specialist help.”

We take into account a range of factors, including any regular debt repayments

Neither Strutt nor Stephenson says a payday loan is necessarily fatal to a mortgage application — just that a borrower’s choice of lender may shrink or they may need extra aid.

Therefore, the role of a broker may become even more important, according to L&C Mortgages director David Hollingworth. He says: “If the borrower is regularly using payday loans, it could be a sign of fragile finances and living beyond their means. However, if the use of payday loans is not recent and hasn’t been regular, it should not preclude the borrower from applying for a mortgage. This is where an adviser can help.”

BNPL is a more recent short-term credit phenomenon and at present is unregulated, although the FCA plans to police it in the coming years. Instead of the customer paying for a product at the checkout, a lender such as Clearpay, Klarna, Laybuy or PayPal pays the retailer and the borrower pays back the money, interest free, over a few weeks or months. There is no hard credit check but lenders will conduct a soft check.

Payday loans have never been popular with lenders

BNPL is a growing industry, particularly among younger people, so brokers may need to watch out for it more with first-time buyers. Some estimates suggest that in 2020 there were £10bn-worth of BNPL loans in the UK, while price comparison website Finder.com says the market could double in size by 2023.

According to research in July by another comparison site, Money.co.uk, one in six respondents said BNPL schemes had led them to purchase more than they could afford.

There are only limited reports of mortgage applicants being declined because of a BNPL loan on their recent record. That said, it is still a relatively new market. Kind Financial Services mortgage and protection adviser Sabrina Hall says one of her clients was declined recently because they had used Klarna.

When Mortgage Strategy asked other brokers for similar stories, none said they knew of a client specifically denied a mortgage because of a BNPL loan, but some suggested BNPL could still prove problematic if used too often.

Taking out a payday loan was not a problem for many lenders a few years ago

Hollingworth explains: “In extreme cases where there’s heavy BNPL use, there could be further questions posed by the lender to ensure there are no underlying issues.

“There could be bigger problems for those using these agreements if they fail to meet the scheduled payments.”

Stephenson similarly does not suggest BNPL dashes a client’s mortgage chances but says it can create problems: “While schemes such as Klarna are often used for convenience, they could trigger automated red flags for some lenders. However, if balances are paid on time, people shouldn’t have too many application problems.”

She insists the market should carefully watch how mortgage lenders treat BNPL borrowers in case things change in future.

“It is important to keep tabs on how lenders judge eligibility, particularly as BNPL options continue to grow,” she says.

“The main thing people should remember when contemplating a purchase in the run-up to a mortgage application is to decide whether they really need BNPL and how long it will take to pay off any balance.”

If used sensibly and within the agreed terms and conditions, BNPL schemes can arguably be useful and help to build credit scores

Mortgage Strategy asked a number of the major lenders for their policies on applicants who had recently taken out a BNPL loan, given it is a relatively recent phenomenon.

The general gist from them is that a few BNPL purchases here and there are not likely to harm a mortgage applicant’s chances but sustained high use may do, as Hollingworth suggests. Plus, any future payments are likely to be taken into account when assessing a borrower’s affordability.

Barclays says BNPL customers are not automatically rejected and its underwriters do not look out specifically for a BNPL loan. However, it recommends, “all prospective home-owners not to enter into any new credit agreements before applying for a mortgage and to ensure all short-term debt is paid off before submitting a mortgage application”.

Nationwide says it, “captures deferred purchase agreements that have more than six months remaining as part of the mortgage application”. This could mean some BNPL loans are not considered because they may not last more than six months.

“It makes sense for a lender to factor in monthly commitments for affordability,” says Hollingworth, “although in many cases these may be so short term that they will be finished prior to completion and so may even be ignored for affordability.”

Unexpected benefit

Mortgage Hut managing director Nicola Schutrups says BNPL can actually help clients to obtain a mortgage if borrowers make payments on time.

“If used sensibly and within the agreed terms and conditions, BNPL schemes can arguably be useful and help to build credit scores,” says Schutrups.

Generally, the attitude is that, if you need to take a payday loan, you probably should not be getting a mortgage

Another alternative type of borrowing that has grown in popularity over recent years is the guarantor loan, where the borrower can ask a friend or family member to be their guarantor in case they cannot make payments. Such loans are usually repaid over one to five years but, with typical huge rates of about 50% APR, costs can spiral over that time. When you consider these loans are generally taken out by sub-prime borrowers for whom money may be tight already, they can put a big strain on people’s finances.

Naturally, given the way such loans are structured, it is not just borrowers who can be lumbered with big bills. So too can the guarantors.

Salary advance

With the most recent lending phenomenon, a salary advance, individuals are paid some of their salary in advance by the lender, often in return for a fee. Many debt charities and the FCA have warned that these schemes can create financial problems for borrowers. What’s more, they are unregulated.

There is no chance of a borrower failing to make repayments on these loans, because the lender is paid by the employer, with the two working together. The big concern is about people spending frivolously outside their monthly salary cycle, possibly leaving them short when bills are due after their official payday.

It makes sense for a lender to factor in monthly commitments for affordability

Similarly to payday loans and BNPL, there is little in lenders’ official criteria that precludes guarantor loan or salary advance borrowers from getting a mortgage. But their presence can indicate other financial problems, while the high cost of guarantor loans can count against clients when affordability assessments are carried out.

Strutt says: “The difficulty for many borrowers is that, when they take out credit before applying for a mortgage, they do not realise it can negatively affect them. With lenders being so heavily reliant on affordability, even small commitments can cause loan sizes to be reduced.”

Payment holidays

Another possible blocker for mortgage applicants derives from payment holidays for those who cannot afford their mortgage payments due to pandemic-induced financial woes. The official mortgage payment holiday scheme for people impacted by the lockdowns ended in July 2021, but some borrowers may still have payments deferred by their lender as part of tailored support.

While payment holidays under official industry-wide Covid-19 support measures did not appear on credit files, many brokers have pointed out such schemes could come back to haunt mortgage applicants because lenders would find out about them via affordability checks, and they reveal a struggle to make payments. In fact, a number of lenders, such as Metro Bank and Santander, specifically stated in their criteria that a Covid-19 payment holiday would be taken into account if it was still going on at the time of application.

With lenders so heavily reliant on affordability, even small commitments can cause loan sizes to be reduced

Now, any payment holiday will be recorded on credit files because the Covid-19 scheme is over, which makes it even more likely borrowers using one could struggle to either remortgage, move home or borrow more.

In its advice for consumers, trade body UK Finance states: “Where you require tailored support, this will be reported on your credit file to ensure an accurate reflection of your circumstances is recorded.”

While lenders have always been nervous about lending to borrowers who are close to the financial edge, there are now more triggers that can push clients to the brink, whether that is the pandemic or the array of new credit options.

With the rise of BNPL and salary advance schemes, who knows if these could push more consumers into the mortgage abyss.