31/08/2022
Last week Ofgem, the energy regulator, announced that the energy price cap will increase from £1,971 to a new record high of £3,549. This comes after a 54% increase earlier this year, and there are suggestions that the cap could pass £6,000 next April.
According to research undertaken by Legal and General, British households are, on average, only 19 days from the breadline. This research shows that close to 2 million adults have no money left each month after paying their bills. This represents a rise of 330,000 people over the past two years. Sadly this statistic can only get worse in the present economic environment. 5 million people across the UK, are living pay packet to pay packet, as they earn under £20,000 per annum and therefore have no safety net at all.
UK households have average savings of £2,431 and debts of £610. With average daily expenses totalling £93, this would see the average household run out of money in less than three weeks (19 days) if they were to lose their income. The research found that most people underestimate how long their money would last, assuming they would have 60 days of breathing room were they to lose their job. However, with the on-going surge in energy and food bills, this time buffer will be increasingly less.
In my previous article I predicted that these increasing costs are likely to temporarily negatively impact the housing market by denting the efforts of first-time buyers to save a sufficient sized deposit.
One of the key considerations of mortgage affordability has always been utility bills and food. It's not difficult to make the leap and consider that lenders will be taking a more cautious approach regarding affordability. It is really important, when taking mortgage advice, that these mainstay household expenses are discussed when considering cashflow and the personal affordability of the new mortgage facility. Lenders will probably want to see a wider buffer when considering new mortgage/remortgage applications and further advances to cover higher bills after the completion date. As I say to all my clients, 'you can't live off bread and cheese'.
Although I have predicted that inflation may drop towards the back of 2023, this is subject to gas, wheat and sunflower oil supplies and prices as a direct result of the ongoing war in Ukraine. This war is becoming a long war. President Zelensky is now determined to reclaim not just what the country has lost since Russian troops invaded this year, but also Crimea and the Donbas region. These areas are the home of Russian citizens who are prepared to kill their Ukrainian neighbours in order to keep their Russian status. This has now become a two-tiered battle. Whilst soldiers fight for reclamation of territory, neighbours are outing each other for the same cause.
Everyone also has to consider that, with the impact of climate change becoming more apparent through systematic destruction across the globe, that it will cost considerable money and time to wean ourselves off traditional energy sources, as we all move to greener and more sustainable alternatives.
With the changes coming into effect in January 2025 regarding a lifting of the minimum acceptable EPC grade, first-time buyers and home movers need to consider the sustainability of the property that they want to buy. The purchase of solar panels has increased over the past few months. With the advancement in technology since these energy producing devices first came on the market, this may be the way that householders take back control of their energy bills. Properties with heat pumps and solar panels in situ are going to be in demand and therefore secure higher prices compared with direct comparisons lacking these services.
Applying for longer mortgage terms and longer fixed rates will help make monthly mortgage payments more affordable. But you have to remember that you are just stretching a capital repayment commitment date, and kicking the can down the road. There is a danger that clients will try to switch to interest only mortgages. Many lenders have become uncomfortable with this option for the entire mortgage facility. They have been dealing with the fallout of mortgage prisoners who decided to do this over 25 years ago. These borrowers have nowhere to go now due to multiple issues revolving around affordability and switching to capital repayment over considerably shorter mortgage terms.
This has led to the increased take up of lifetime mortgages as a last resort for keeping the family home. But although this sector of mortgage lending has massively improved by offering better regulation and No Negative Equity protection on the majority of these mortgage schemes, they should still be considered as riddled with compromise when it comes to early redemption penalties, fixed gilt-backed penalties and the ravages of compound interest. I have many clients that benefit from these types of mortgages, but it is fundamental that clients ( especially those on State Benefits ), their Powers of Attorney and beneficiaries consider this option with their eyes wide open. For these reasons, everyone has to be involved in the decision making, not just the client and the appropriately qualified Equity Release mortgage adviser.
When the property market has contracted in the past, DIY and home improvements have become the mainstay. I predict this will happen again where people can afford to do so. This time the difference will be that it will not just be about extensions, loft conversions and basement builds. There is no point adding space that you can't afford to heat. It will be about investing in property sustainability and energy efficiency. Hopefully this will drive the price of solar panels and heat pumps down, therefore opening up the possibilities for more property owners to go down this route than has happened in the past.
Whatever you do, always seek out qualified mortgage advice.
I am here to help.
Rowena Chowdrey
DipFA MIFS CeLTCI CeSRE MAQ
Independent Financial Adviser and Mortgage Broker
Member of the Equity Release Council
Website: www.financialmoves.org
