Will higher gas and electricity bills make it harder to get a mortgage? We take a look at what impact the rising cost of living is having on mortgage availability.
Energy bills have more than doubled this year as the conflict in Ukraine continues to drive gas and electricity prices higher.
The energy price cap has increased from £1,277 a year at the start of 2022 to £3,549 now. And further price increases are predicted for January 2023.
The rising cost of heating and lighting a home is having a knock-on effect on the mortgage market.
Here’s what you need to know and how you can make yourself more attractive to mortgage lenders.
Why are rising energy bills impacting the mortgage market?
Unfortunately, lenders can’t ignore the impact higher energy bills will have on people’s finances.
Before offering you a mortgage, they need to make sure you can afford the monthly repayments.
Richard Donnell, Director of Research and Insight at Zoopla, explains: “Over the last five-plus years, lenders have focused much more on checking the affordability of mortgage repayments as part of a households’ overall spend.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, adds that most lenders use data from the Office for National Statistics as part of their affordability assessments. This data reflects the recent rise in energy costs.
“As lenders have plugged this new data into their calculations, borrowing potential has been negatively impacted and lower lending limits are being offered,” he says.
Will it be harder to get a mortgage?
Some people are likely to find it harder to get a mortgage due to the rising cost of living.
If a lender feels your budget is too tight to cope with further hikes to energy costs, as well as other price rises, they might offer you a smaller amount to borrow.
But it’s not all bad news.
Richard points out that mortgage stress testing has been higher over the last few years.
Most people who have bought a home or remortgaged recently will have needed to show that they would have been able to afford repayments at a much higher mortgage rate of 6% or 7%.
This requirement has since been removed, but it means if you’re remortgaging you should have enough flexibility in your budget to meet the cost of higher energy prices.
Who will be impacted most?
First-time buyers and borrowers with low incomes are most likely to be impacted by lenders tightening their affordability criteria.
“Rising energy bills will affect different income groups to a greater or lesser degree. Low income households with less disposable income will be more impacted by energy caps rising,” Mark Harris says.
By contrast, people with high incomes looking to borrow a high multiple of their salary are less likely to be affected, according to Jonathan Harris, of Forensic Property Finance.
“By making the tweaks to their systems, lenders can still confidently lend high loan-to-incomes to people who can afford to cover all the costs comfortably,” he says.
He adds: “The changes are most likely to affect those who are really pushing themselves to borrow as much as possible. This is most likely to be first-time buyers, as it all comes down to the deposit and how much you can raise.”
Will banks be more reluctant to lend?
The good news is that lenders are still very much open for business, even if they are tightening their affordability criteria.
Jonathan Harris says: “Lenders will not become reluctant to lend. They have the systems in place to lend in a responsible fashion due to the constant tweaks they are making to affordability criteria.”
So while banks may be more cautious about the amount they will advance to an individual, it’s not expected to be as widespread as it was at the start of the Covid-19 pandemic.
What will happen to mortgage rates?
Mortgage rates are already rising across the board as a result of increases to the Bank of England base rate.
The official cost of borrowing has jumped by 1.65% since December last year, and most of this increase has been passed on to new mortgage customers.
On top of this, Donnell also expects mortgages for people with small deposits to become more expensive. It’ll reflect the greater risk these borrowers pose in the face of the rising cost of living.
“When the economic outlook is uncertain and there is greater risk, lenders tend to reduce the availability of loans at higher loan-to-value ratios. They also sometimes increase the cost of mortgages at these levels to cover the risk, which can reduce demand,” he says.
What can I do to help me qualify for a mortgage?
Mark Harris points out that while you can’t directly influence inflation, you can make yourself more attractive to lenders.
Cut back on unnecessary spending and reduce or pay off financial commitments such as loans and store cards.
Jonathan Harris agrees: “Get rid of any committed monthly expenditure such as a Netflix subscription or gym membership, particularly if you rarely use them. Pay off credit cards and loans if you can and conduct your accounts cautiously. Make sure you pay bills and things like parking fines on time.”
Will higher energy bills impact the housing market?
Rising energy costs may encourage some people to move to find a more suitable home that is lower cost to run, according to Donnell.
Buyers are also likely to pay closer attention to the running costs of a property than they have done in the past.
In fact, a recent survey found that the better energy rating and lower running costs of new homes is an increasingly attractive proposition for new buyers.
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But rising energy costs are not expected to trigger anything as dramatic as a house price crash.
This is in part because borrowers who took out mortgages in the past few years will have faced strict affordability tests to ensure they could still afford their repayments even if costs rose.
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At the same time, the majority of homeowners with a mortgage are on a fixed rate deal, meaning they will be insulated from interest rises until they need to remortgage.
Instead, house price growth is expected to slow gradually during the rest of the year as buyer demand eases.
Key takeaways
- Lenders will factor higher energy bills into their affordability calculations, which might reduce the amount you can borrow for a mortgage
- You might find it harder to get a mortgage if lenders feel you do not have enough room in your budget to cope with further price hikes
- Try to cut back on unnecessary spending and reduce any outstanding debts to make yourself more attractive to lenders