How will the new energy price cap affect the mortgage market?

We asked mortgage experts how rising energy costs will affect both first-time buyers and existing homeowners, and how brokers can help find the most affordable solutions for their clients.

Annabelle Williams, personal finance specialist at Nutmeg, said: "Forecasts are already suggesting that inflation could exceed 13% by the autumn and increased energy bills will exacerbate the pressure on household finances. Many households face making difficult choices to keep the lights and heating on at home this winter.

"People hoping to make major financial decisions this autumn such as moving home, spending on home improvements or taking out a loan will want to consider the changed economic climate. 

"Mortgage lenders have been tweaking their calculations to take into account higher interest rates and the increased cost of living when deciding how much to lend. Some lenders have also stopped offering riskier mortgages such as those with high income multiples, because of the uncertain outlook for household finances.

"These changes mean some people may not be able to borrow as much as they expected. Whether you’re a first-time buyer or home mover looking to purchase this autumn, it would be wise to stay in touch with your mortgage broker or existing lender to make sure you will be able to borrow what you were expecting or may need."

Richard Pike, chief sales and marketing 0fficer at Phoebus Software, commented: “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.”

Richard Tugwell, director of mortgage distribution at Vida, said: “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% in 2023 looking more realistic every day. Worryingly, if these forecasts hold true, by April next year, energy bills will swallow almost a fifth of the average household’s income. Soaring energy bills will put even more pressure on households’ finances, which for many are already hugely stretched. This will no doubt impact prospective homebuyers’ affordability.

“These price hikes are affecting those on lower incomes the hardest. Recent research commissioned by Vida showed that 74% of keyworkers who don’t own their own home worry that they will never be able to, and the rising household bills will no doubt add to their concerns. 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 Covid-19 pandemic. As a responsible lender we will continue to work with our broker partners to focus on the most affordable solutions for their clients.”

Rhys Schofield, managing director at Peak Money, commented: "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."

Jamie Lennox, director at Dimora Mortgages, added: "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."