Energy price cap has risen 54%
Everyone will soon be feeling the impact of the cost-of-living rising, according to David Hollingworth (pictured), associate director of communications at L&C Mortgages.
“Despite attempts by the Chancellor to mitigate the impact of cost-of-living rises for households, unveiled in his Spring Statement, there is no doubt that everyone will soon be feeling the effects of rising costs, if they are not already,” he said.
According to Ofgem, there has been a record increase in global gas prices which has seen the energy price cap rise 54%. The energy price cap increased from April 01, for approximately 22 million customers. Those on default tariffs paying by direct debit saw an increase of £693, from £1,277 to £1,971 per year and prepayment customers saw an increase of £708, from £1,309 to £2,017.
“Fuel and energy costs have been among the steepest rises but everywhere we look there seems to be higher costs to contend with,” Hollingworth said.
It is believed that energy bills will increase 14 times faster than wages over the course of 2022. Retirees are in a particularly vulnerable position as many are unable to increase their contracted hours, switch careers or work to secure a pay rise.
Hollingworth went on to say that higher inflation has already brought action from the Bank of England with three interest rate rises already implemented and more on the horizon.
The bank’s Monetary Policy Committee (MPC) voted to increase the bank rate by 0.25 percentage points, from 0.5% to 0.75% in March. The increase was the third consecutive since December, when the MPC elected to up rates from 0.1% to 0.25%, and then from 0.25% to 0.5% in February.
“The heightened anticipation of these rate rises was enough to spark a shift in mortgage rates last year and that has continued at a rapid pace, resulting in some benchmark headline rates broadly doubling in the space of about six months,” said Hollingworth.
What impact has this had on mortgage rates?
Hollingworth noted that mortgage rates are still relatively low in historical terms and borrowers can at least lock their rate down.
“[This is] something which many will be keen to do given they have little control over some of the inflationary increases,” he added.
Despite the relative lows, research from L&C Mortgages showed that the average of the top 10 lenders’ two-year fixed rates has climbed by 1%, while five-year rates have increased by 0.92% since the record-lows of last year.
The increase to the two-year average rate would mean that the same mortgage would cost over £800 more per annum.
“Higher interest rates also mean that stress rates are also climbing and that will potentially start a tightening in affordability criteria that will be felt by borrowers,” added Hollingworth.
Hollingworth explained that borrowers should expect that their higher outgoings will begin to feature in lender affordability tests.
“How marked that change might be is difficult to quantify at this stage but it is unlikely to make borrowers’ lives any easier,” he said.
Santander, for example, will factor increased national insurance, household expenditure and dividend income tax rates, as well as changes to Scottish tax bands into its affordability following the cost-of-living rise at the start of April 2022. Higher outgoings impact how risky the loan is for the lender.
“As a result, the advice of a mortgage broker will only be more important as households attempt to navigate the wave of change coming at them,” concluded Hollingworth.