Last week Ofgem, the energy regulator, announced that the energy price cap will increase from £1,971 to a new record high of £3,549. This comes after a 54 per cent increase earlier this year, and with forecasts suggesting that the cap ‒ which will be reviewed quarterly rather than twice a year from 2023 ‒ could pass £6,000 next April.
The increasing costs are likely to have a tangible impact on the housing market, for example denting the efforts of first-time buyers to build a sufficient deposit.
Brokers told Mortgage Solutions that they were seeing lenders take a more cautious approach towards affordability off the back of rising bill pressures, while advisers also emphasised the importance of discussing these cost increases with clients at the outset.
Advisers need to guide clients
Jamie Lennox, director at Dimura Mortgages, said that it would be “foolish” for brokers not to discuss how sustainable any house purchase is over the long term, as well as flagging up the importance of clients checking the energy performance certificates of the home they are looking to buy.
“It would also make houses with solar power become hot property in the months to come,” he continued.
We are now in the “perfect storm” of crippling energy bills and increased mortgage costs, said Dominik Lipnicki, director of Your Mortgage Decisions.
“All brokers will want to ensure that clients can not only afford the current outgoings but also take into account possible future increases,” he continued.
Lewis Shaw, founder of Shaw Financial Services, explained that his firm is being “forensic” in budget planning with clients, in order to ensure they are able to meet repayments in the future, while also reducing the chances of applications being rejected.
Shaw continued: “The knock-on effect is buyers sometimes have to readjust their expectations between what they want and what they can genuinely afford, which is often a bitter pill to swallow. However, as I tell new buyers, it’s better to swallow that pill now rather than get into trouble down the line because if that happens, you can quickly find yourself up the creek without a paddle.”
Tough decisions for borrowers
Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, said that energy bills and the impact on affordability was something being discussed with clients on a daily basis as “it’s not always what they can officially afford ‘on paper’, it’s what feels comfortable to clients”.
“Most clients are looking at longer terms to stretch the mortgage and keep the monthly repayments lower. Therefore if ‒ or more likely when ‒ their energy bills go up, they have some wiggle room to account for this,” she added.
The situation is also causing some borrowers to change plans altogether. Jamie Thompson, mortgage broker at Jamie Thompson Mortgages, said that a young couple he was advising had elected not to move specifically because of increases in energy bills.
He explained: “They already own their own home, and have a baby on the way, so they needed a bit more space. However, they’re looking at the numbers and have decided that unless the government steps in and provides assistance with energy bills, a bigger place with an extra mouth to feed and more rooms to heat just isn’t viable.”
Changing attitudes among lenders
According to Lennox, it’s already evident that lenders are adopting a tighter approach as a result of the economic situation.
He said: “We’ve already seen an application we submitted two weeks ago which couldn’t proceed due to a property down valuation. On a new application, that same lender would now offer the client £8,000 less than we previously applied for and we suspect more changes will come in the background if they haven’t already.”
This was echoed by Shaw, who said the massive energy costs increases are already impacting the affordability calculators of lenders, and suggested this was only likely to become more pronounced.
Bickford agreed that lenders were already adapting affordability calculations to take into account rising energy bills, as part of the overall increases to the cost of living.
Bickford added that the job of the broker in helping clients find an appropriate and affordable deal was even more vital given the “turbulent period we are facing”.
However, Thompson suggested that lenders do not appear too concerned at the moment, arguing that many simply factor in data from the Office for National Statistics for utilities costs and that the increases will take time to feed through.
“Raising interest rates, larger borrowing amounts, and increased energy costs could be setting us up from the perfect storm,” he cautioned.
Turning to equity release
Increasing numbers of older borrowers are turning to equity release, in part due to issues like rising energy prices, according to Bickford.
She explained: “I am finding more retired homeowners releasing equity to have a pot of savings available, so they feel secure and do not have to worry about finding the money to meet their monthly costs. This gives them peace of mind that whatever comes their way with inflation, energy price hikes, food and fuel cost increase, they have a nest egg to fall back on and do not need to worry.”
