"Borrower beware" as wholesale energy costs see energy price cap rise by 5%

Higher wholesale energy costs have resulted in a 5% increase in the price cap during the first quarter of 2024, the energy regulator, Ofgem, announced this morning. Brokers warned the increase could dampen sentiment and, if these upward inflationary pressures continue, the mortgage rate cuts of the past couple of months could quickly be reversed.

For an average household paying by direct debit for dual fuel, the 5% increase equates to £1,928, a rise of £94 over the course of a year — around £7.83 a month. 

Jonathan Brearley, CEO of Ofgem, said: “This is a difficult time for many people, and any increase in bills will be worrying. But this rise – around the levels we saw in August – is a result of the wholesale cost of gas and electricity rising, which needs to be reflected in the price that we all pay."

According to Justin Moy, managing director at Chelmsford-based broker, EHF Mortgages: “Borrower beware. Thursday's energy cap announcement is a reminder that increases in wholesale energy costs could signal more inflationary pressures and potentially push mortgage rates up again if prolonged. The increase of around £8 a month is not going to challenge any affordability model, but any stubborn inflationary pressures to the upside could derail the rate decreases we've seen in recent months in a heartbeat.”

Charles Breen, director at Wellinngborough-based broker, Montgomery Financial, said it would give the Bank of England pause for thought: “What Jeremy Hunt giveth, Ofgem taketh. All the help to the average person that the Chancellor announced yesterday and wanted to be lauded for has been pretty much wiped out by this announcement by Ofgem. People will only see it as another bill rising but the real fear is that rising wholesale energy costs and the increase in the National Minimum Wage announced on Wednesday could see the Bank of England consider another rate hike.”

Craig Fish, director at London-based broker, Lodestone Mortgages & Protection, added that the increase in the price cap could dampen sentiment: “This is a stark reminder, at a time when people use energy the most, that we are not out of the woods yet. Any measly savings made from the NI reductions announced in the Autumn Statement have already been eaten up for many. Whilst this increase, on its own, won't have a huge impact on affordability from a lender's standpoint, it won't feel great to the consumer and sentiment is everything in the mortgage and property markets. Let's not forget that there are still more than 1 million fixed-rate mortgages ending next year with monthly increases of easily over £200 per month, and this is also going to impact inflation. Jeremy Hunt is beginning to resemble Ebenezer Scrooge more with each day that passes."

Graham Cox, founder at Bristol-based broker, Self Employed Mortgage Hub, was also concerned: “Inflation isn't anywhere near being tamed and is still at the mercy of geopolitical events in Ukraine and the Middle East. Though this small rise in the energy price cap is unlikely to have any significant effect on mortgage affordability, there's no room for complacency.”

As was Kirsty Wells, director at Blueprint Mortgages & Protection: “Just as people are resorting to putting their heating on, this change will cause panic and concern among those already struggling financially each month. From a lender's point of view, I can't envisage it affecting their affordability calculations. Still, the negative press won't encourage prospective homemovers to jump up to the next rung of the property ladder and increase their mortgage.”

Michelle Lawson, director at Fareham-based Lawson Financial, said: “The rise in the price cap didn't come as a surprise and may trigger a small adjustment in lender affordability models. We need to be more mindful of the effect this will have on inflation as the fall in energy prices was the sole contributor to the reduction in headline inflation to 4.6% in October. Inflation is likely to increase, especially with the announcement in the Autumn Statement increasing the living wage.”

Stephen Perkins, managing director at Norwich-based Yellow Brick Mortgages, added: “Whilst a 5% rise in energy costs will hit the average household’s post-Christmas budgets hard, it won’t have a major impact on lender affordability calculations. However, let’s hope rising energy costs don't awaken the inflationary dragon from its recent nap.”

But Samuel Mather-Holgate, director at Swindon-based Mather and Murray Financial, was upbeat: “Although bad news for households as they expected energy bills to continue to fall, this shouldn’t have a material effect on the trend for inflation and the base rate. A cut to Bank Rate should still come early 2024 as Threadneedle Street seeks to stave off recession.”

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