Every week there seems to be a new grim projection as to how much energy bills will increase this winter. The sheer scale of these hikes could be enough to push some individuals into the red.
Recent research from Uswitch found that six million homes – almost a quarter of households – already owe an average of £206 to their energy provider. Household energy debt now stands at an all-time high of £1.3bn – nearly three times higher than it was in September last year.
Given that we are still in the infancy of the energy bill increases, this is a worrying statistic. Unfortunately, we are likely to see things get much worse before they get better.
The Citizens’ Advice has warned that one in four people in the UK simply will not be able to afford to pay their energy bills in October based on current forecasts.
It believes this figure could jump to one in three people in January when prices are predicted to soar above £4,200. Add to this rising inflation and growing fuel costs and we are likely to start to see some borrowers’ financial profiles change.
The increases will affect homeowners in different ways. At one end of the scale, there will be those who are already in long-term financial dire straits for whom the increases could push them into more critical financial trouble such as missed mortgage payments.
So far, the latest arrears figures from UK Finance are no cause for alarm – at least on first inspection. The total number of borrowers in arrears continued to fall in the second quarter of 2022.
Overall, there were 74,540 homeowner mortgages in arrears at the end of June 2022, a reduction of approximately 200 homeowner mortgages compared with the previous quarter and 10% fewer than in the same period last year.
Within that total however, there were 25,160 homeowner mortgages in early arrears – representing 2.5% to 5% of the outstanding balance – a 1% rise on the previous quarter.
While it is too soon to read too much into this, it could be an early indication that some borrowers are starting to struggle.
However, for most borrowers, mortgage payments will usually take priority over lesser smaller payments, such as utilities and credit cards, so it is still early days.
At the other end of the scale however, we may start to see otherwise financially astute borrowers suffer minor blips – such as a missed phone or TV subscription bills, as they re-juggle finances in the wake of rising costs.
While it has been well-publicised, the hike in energy bills may still catch some homeowners off guard, especially as the season changes, and one simple slip in budget planning or accidental missed payment could come back to haunt them when it comes to remortgaging later down the line.
Even one missed payment has the potential to damage their credit score. There will also likely be borrowers who are unaware of what damage they may be doing to their credit score by missing a payment and it won’t be until they come to remortgage that they discover the consequences.
We just have to look at the recent uptake in the Don’t Pay Campaign, a movement that is encouraging people on mass to stop paying their energy bills and cancel their direct debits in retaliation to the energy increases. While intentions might be noble, how many amongst them realise the impact a couple – or even one – unpaid utility bill might have on their credit score.
In such a scenario, the credit score would not differentiate between what could be dubbed an accidental missed payment to something of more significance. It may be that a recent default or CCJ can be explained and does not necessarily equate to the borrower being in long-term financial difficulty and unable to meet their loan or mortgage payments.
Lenders that rely heavily on a credit score when making their lending decisions may not be able to ascertain the whole picture when it comes to the borrower’s current financial situation.
A second-charge could work out to be a good option for borrowers who are looking to raise additional funds through a remortgage but have a less than perfect credit score. Lenders such as ourselves base our decision to lend on the individual and their current circumstances rather than their credit score
Given that a missed payment can stay on a borrower’s credit score for up to seven years, a borrower may also utilise a second-charge while their score improves, then remortgage with a mainstream lender further down the line.
Over the coming months, advisers will be at the frontline when it comes to helping clients navigate their way through their options and should have seconds in their first thoughts.
Kerri Pender is operations director at Evolution Money
