Brokers and lenders from across industry have reacted with concern about the energy price cap raise which will increase by more than 80 per cent from its current price of £1,971 to £3,549 in October. Many are worried both about mortgage affordability and how the increase will affect those households on lower incomes.
The enormous rise follows soaring wholesale energy prices, driven up by Russia deliberately restricting oil and gas supplies to Europe and the UK over the past six months following its invasion of Ukraine.
Last week saw a 15 per cent increase in wholesale prices with energy analysts Cornwall Insight warning the “highly volatile nature of the market” means forecasts for the next hike to be announced in January would be subject to “significant change – both up and down – over the next few months”.
Cornwall Insight’s updated forecasts now expect energy bills to hit £4,650 in January and £5,341 by April next year.
A separate forecast from research house Auxilione estimates even higher average bills, with its analysts predicting the price cap to hit £6,089 in April 2023.
The broker perspective on the energy price cap raise
“Great emphasis on EPC”
Affordability will be a major issue, according to Jamie Lennox, director at Dimora Mortgages. “This huge increase is certainly going to result in lenders reviewing their affordability calculators in the coming weeks,” he said. “We’ve already seen signs of this happening. 10 days ago we checked affordability with one lender and, as of today, they are now offering £8,000 less on the maximum people can borrow.
He added that buyers would begin looking more closely at a prospective property’s energy efficiency.
He said: “These price increases will certainly make buyers think more about moving and what type of property to buy with a greater emphasis on the Energy performance Certificate (EPC) of the property.”
“Lenders are not daft”
Imran Hussain, director at Harmony Financial Services, agreed with Lennox on the issue of affordability: “I, along with everyone else, will be surprised if the latest price cap will not impact mortgage affordability for the average working person and families,” he said.
Hussain added: “Lenders are not daft and will want to ensure they lend responsibly. As a result, they will either be making adjustments right away or imminently. The value of advice now has skyrocketed to ensure borrowers get the best outcomes.”
“Busy brokers”
And affordability was also front of mind for Rhys Schofield, managing director at Peak Money, who said: “The latest energy price cap can’t help but impact affordability assessments as another few hundred pounds a month of income that could otherwise be used to fund a mortgage gets eaten up. If anything, though, I see this keeping mortgage brokers very busy.
“The reality is that a lot of people simply won’t be able to swallow increased energy costs on top of higher rates come remortgage time, which will force many to sell up and downsize.”
The lender perspective on the energy cap raise
“Energy bills will swallow a fifth of income”
Richard Tugwell, director of mortgage distribution at Vida, explained just how much income would now have to be allocated to energy bills.
“Today’s energy price cap rise is expected to affect already rapidly rising inflation even further, with Citi Group’s prediction of inflation set to hit 18 per cent in 2023 looking more realistic every day,” he said. “Worryingly, if these forecasts hold true, by April next year, energy bills will swallow almost a fifth of the average household’s income.
Given that these hikes are likely to hit low-incoming household hardest, Tugwell called on the Government to provide more help.
“It is more important than ever that the Government steps in to provide support for these low-income families, as well as key workers who were the backbone of our country during the pandemic,” he said.
“Lenders need to be very proactive”
And Richard Pike, chief sales and marketing officer at Phoebus Software, picked out those with fixed rate products coming to an end, who would see higher rates for new fixes.
“Bearing in mind that a “typical household” is a three or four-bedroom house with three or four inhabitants, this will affect a lot of mortgage borrowers,” he said. “Combine this with rising rates for those on variable products, plus the surge of fixed rate expirations expected in the next six months, and many will only be able to fix again on higher rates than their existing products.”
He also explained that lenders now need to go above and beyond their traditional duties as the cost of living crisis shows no signs of abating.
“Lenders need to start being very proactive on offering more high-level generic budget planning and guidance on keeping household expenditure to a minimum,” he said.
“Of course, this goes beyond the norm in terms of proactive arrears management, but investment in this assistance now will only strengthen borrower relationships for the future and highlight any potential arrears issues sooner rather than later.”
