Energy price cap and affordability

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?

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 a 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 of 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.

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.

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.

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.