News that the energy price cap will increase to £3,549 per year for the average household has led to warnings that it “will force many to sell up and downsize”.
As predicted energy regulator Ofgem hiked the current price cap by a whopping 80%, up from £1,971.
The regulator said: “The price cap, as set out in law, puts a maximum per unit price on energy that reflects what it costs to buy energy on the wholesale market and supply it to our homes. It also sets a strict and modest profit rate that suppliers can make from domestic energy sales.
“However, unlike energy producers and extractors, most domestic suppliers are currently not making a profit.
The move will further intensify the cost of living crisis, with inflation being predicted to peak at 18% next year.
It also adds to mounting pressure on the Government to announce a new package of support to prevent people from falling into fuel poverty.
Reaction
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services:
“Demand for property has been ebbing over the past few months, as the media frenzy over the cost-of-living crisis, increasing interest rates and the energy price cap increase dents consumer confidence.
“And against this backdrop we have zero Government action, as they are too busy deciding which captain to put in charge to finally crash the ship on the rocks. In terms of mortgages the change to the energy price cap will impact affordability models in different ways, depending on how the lender captures the information.
“Some lenders use data from the ONS to drive the outgoings in their affordability models; these lenders will likely see reduction in the maximum loans that any given income can generate as the increased energy costs filter through from the ONS data.
“Other lenders ask the broker to enter this data from the figures on the client’s bank statements – this means that those who are especially frugal with their energy may be less disadvantaged in terms of the size mortgage they can generate with this type of lender, than one that uses ONS data.
“Brokers will have a good idea of which lenders use which type of model, as well as having software that can compare multiple lenders’ affordability models at once, allowing them to guide their clients to the best outcomes for their individual situations.”
Robert Payne, director at Langley House Mortgages:
“Many lenders have already factored higher energy costs into their affordability calculations and it is impacting those on lower incomes the most.
“There certainly is a relationship between tougher affordability and demand for property and all of the estate agents we work with say they have seen a reduction in activity, but this is in comparison to one of the hottest markets we have ever seen.
“The concern will be what happens from here. Will rates continue to rocket, will existing borrowers be unable to afford their outgoings and will prospective buyers now hold out until the market settles back down?
Rhys Schofield, managing director at Peak Money:
“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.
“It’s imperative that customers coming to the end of a fixed rate start planning six months out in order to secure a new rate or work out how they are going to cut their cloth accordingly.
Lewis Shaw, founder & mortgage expert at Shaw Financial Services:
“This latest energy price cap increase will undoubtedly impact the economy, not just in households and businesses where it will be most apparent but in reduced consumer spending, unemployment rising and poverty increasing.
“The knock-on effect will ripple through the housing market, where price rises will be arrested and possibly dip. I think we’ll also start to see a shift toward buyers putting more weight on a home’s energy efficiency than ever before.
“Therefore anyone thinking about selling may want to spend a little money upping their EPC rating to achieve top dollar and make their property more sought after.”
Imran Hussain, director at Harmony Financial Services:
“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. 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.”
Jamie Lennox, director at Dimora Mortgages:
“This huge increase is certainly going to result in lenders reviewing their affordability calculators in the coming weeks.
“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.
“These price increases will certainly make buyers think more about moving and what type of property to buy with a greater emphasis on looking at the Energy Performance Certificate of the property.
“Some will end up ruling out moving house or ignore a whole type of property that are deemed less energy efficient.”
Graham Cox, director at SelfEmployedMortgageHub.com:
“Lenders are already factoring the surge in energy prices and other cost of living increases into their affordability models, even if they are hopefully only short-term. But lenders and consumers are understandably fearful. With mortgage costs also soaring, there’s only one direction for house prices to go and it’s not up.”
Richard Pike, chief sales and marketing officer at Phoebus Software Limited:
“The increase of the fuel price cap to £3,549 is not unexpected, but will undoubtedly concern many families. Bearing in mind that a “typical household” is a three of four bedroom house with three of four inhabitants, this will affect a lot of mortgage borrowers.
“Combine this with rising rates for those on variable products, plus the surge of fixed rate expirations expected in the next six months, many will only be able to fix again on higher rates than their existing products. Lenders need to start being very proactive on offering more high-level generic budget planning and guidance on keeping household expenditure to a minimum.
“Of course this goes beyond the norm in terms of pro-active 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.
“Realistically, there doesn’t appear to be any let up on the squeeze of income to pay for priority bills for most households for the next twelve to eighteen months.
“Utilising specialist portfolio analytics from companies such as MIAC acadametrics should add real value to many lenders. In addition, investment in automating standard arrears processes so that time can be spent with those borrowers that really require it.”
