Energy, Middle Incomes, Mortgages and Car Finance

In a week where the headlines have been dominated by chaos emanating from the green benches of Westminster, the NTI newsroom are here this sunny (or it is here) Friday (23 February) with a round up of the news affecting you in the insolvency sector.

We begin this week news which affects just about everybody.  Ofgem has announced this morning the energy price cap (which affects the tariff paid by 29 million homes) will fall by 12.3% from 1 April.  The predictions had been for a fall of 15% so the good news is tempered a little, although the predictions are for a further fall in July.

The more significant news from Ofgem’s announcement is that prepay (as opposed to direct debit) will become the cheapest way to pay.  This is because prepay standing charges have been lowered to equalise them with Direct Debit, yet as prepay unit rates are cheaper, that means overall for a typical user from April, prepay will be about 3% cheaper.  On the reverse side, standing charges for Direct Debit will rise to £334 a year (from £303 now).

A study released earlier this week by abrdn Financial Fairness Trust, a research body set up by the fund manager, said the uncertain nature of work meant there was a one in three chance that someone earning a middle income today would not be doing so next year.

The report, titled Caught in the Middle although that sounds like a game played in a primary school playground, said that problems of middle-class insecurity were especially acute for single parents, with those in employment more likely than not to be in an insecure job.

Donald Hirsch, a policy adviser at the FFT, said 20% of those in the middle fifth of the income distribution were struggling to pay for food and other essentials. “It is people earning between £30,000-£60,000 a year, depending on the type of household, people who you would expect to be doing OK,” he said.

“Being on a middle income does not make people secure. In the present cost of living crisis, the vulnerabilities of people on modest incomes have become more apparent. They face significant uncertainties, and are rightly encouraged to save both for rainy days and their retirement,” Hirsch continued.

The report defines work as “insecure” if someone is either self-employed or has been working for their present employer for less than two years, or less than three years if working part-time. It also classifies very low-paid full-time jobs – where pay is less than half the full-time average – as insecure.  Worklessness – combining unemployment and economic inactivity – fell from 20% to 18% over this period, but secure employment also fell, by 1.5 percentage points, while insecure employment rose by four percentage points.

The study, which could be accused on being insensitive in times where the poorest have had to make difficult choices about heating or eating, found that more than one in four people in the middle of the income distribution were not in secure employment, and one in seven were not in secure housing. One in three of those in the middle quintile (the middle 20%) in a given year will have slipped down to a lower quintile the following year.

“Some groups are clearly more vulnerable than others. Single adults and lone parents have less security and resilience than couples. People in privately rented accommodation face the double disadvantage of high housing costs and low security,” the report said. “Younger adults are more likely than older ones to have insecure work, higher housing costs and be repaying student debt.”

One factor which affects the squeezed middle and Middle England is the rate someone pays on their mortgage.  This week has seen mortgage providers increase their rates on new fixed deals.

Whilst January saw lenders cutting their rates sharply, bringing some relief to the 1.6 million people set to remortgage this year, this week has seen several banks, including HSBC, NatWest and Virgin Money increase the cost of new deals.  Santander, Coventry Building Society and TSB all raised rates on new fixed deals earlier in the week.

These increases have meant the end of widely available five-year fixed deals with a rate of less than 4%.  "This may catch some borrowers by surprise when the rate story this year has generally been one of falling rates," said David Hollingworth, from broker London and Country.

Andrew Montlake, managing director of Coreco mortgage brokers, said: "There is massive sense of deja vu as several mainstream lenders have increased their rates with little notice in a throwback to the dark days of 2023.

"This all makes life extremely difficult for those trying to find a new mortgage, as once again, quick decisions are needed or carefully worked out budgets need to be revisited, which can sometimes mean the difference between obtaining their dream home or not."

However, there are signs of lenders failing to settle on where rates should be set. Halifax, part of Lloyds Banking Group, is cutting the rates on some of its deals on Friday.  "I expect there will still be plenty of jockeying for position as the market remains extremely competitive but in the short term we may still see more movement in mortgage rates," Mr Hollingworth said.

Finally, Lloyds Bank has set aside £450m to cover the potential cost of an investigation into car finance deals by the UK's financial regulator.  Lloyds revealed the provision as it announced its pre-tax profits jumped to £7.5bn last year, which was higher than expected and up 57% from the year before.

A probe into whether people had been paying too much for cars was launched by the Financial Conduct Authority (FCA) last month.  Under what were called discretionary commission arrangements, some lenders had allowed car dealers to adjust interest rates on loans, which would improve the commission they received.  In short, the higher the interest rate, the higher the commission.

As a result, these deals created an incentive for brokers to increase how much people were charged for their car loan, without them knowing they were being charge more.  In 2021, the FCA banned these arrangements, saying it would collectively save drivers £165m a year.

The FCA announced last month that it would investigate whether people who believe they were charged too much for car loans were owed compensation.  Lloyds is seen as the most exposed of the major banks to any claims, as it owns one of the UK's largest motor finance providers, Black Horse.

Last month, the regulator said that about 10,000 people had made complaints to an ombudsman, with "many more waiting in the wings".  Money Saving Expert, the website founded by Martin Lewis, is stating that 865,000 have submitted complaints through its tool.

This issue has the potential to become the next PPI, with the subsequent knock-on effect on claims falling into Bankruptcy estates and IVAs.