Summer isn’t a time of year when energy bills tend to be front of mind. The improved weather means most of us aren’t having to worry about turning on the heating, after all. There’s more good news on this front too, with Ofgem - the energy regulator - announcing that the energy price cap will drop by 7% from July.
With wholesale energy prices stabilising, many homeowners will see a modest drop in their bills – welcome news after the turbulence of the last few years.
But we shouldn’t get carried away. Even as energy bills come down, they remain substantially higher than they were just a few years ago. Indeed, the big driver in the recent increase in inflation to 3.5% was household energy bills. The UK’s cost-of-living crisis has left deep scars, and for many, energy costs have been just one part of a broader strain on household budgets.
Paying the price for warmth
Energy bills have been among the most visible signs of financial stress post-pandemic.
From the rapid escalation of the energy price cap to the surge in energy debts - according to Ofgem the average debt level for those without an arrangement plan is above £1,600 for electricity and £1,376 for gas - it’s clear that many households have struggled to keep up. Citizens Advice supported over 60,000 people with energy debt last year alone, a 20% increase on the year before.
But energy costs are only part of the story. Households have faced inflationary pressure across the board – from food to council tax. Even broadband and mobile bills have climbed, compounding the pressure. For many, this has meant juggling priorities, cutting corners, and – in some cases – missing payments.
The result has been credit scores taking a hit, even for borrowers who are now financially stable. Temporary issues, such as job loss or a surprise bill, may have left long-term marks on credit profiles.
The need for near prime
This evolving financial landscape has created a clear need for more inclusive mortgage options. There’s a cohort of borrowers who are more than capable of managing a mortgage today, but find themselves excluded from mainstream lending due to a payment blip during a difficult period.
Payment issues happen – often due to entirely understandable circumstances. As a lending industry, we need to distinguish between persistent financial difficulties and short-term turbulence that’s now under control.
Without having a decent crop of near prime products and lenders from which to choose, we risk leaving significant numbers of aspiring borrowers with nowhere to go.
Responding to gaps
Of course, if lenders want to support near prime borrowers, then we need to get the products and criteria right. That’s where broker feedback is so important.
It’s been that dialogue with brokers which has informed the suite of enhancements we have made to our criteria over the last year. By more than doubling the level of unsatisfied defaults we could consider, from £1,000 to £2,500, we have broadened the number of near prime borrowers Atom Bank can support.
Similarly, the recent move to increase the maximum LTV available on the range to 90% means that those borrowers with a credit blip and a more modest deposit can also benefit. Off the back of this change, around 40% of all our near prime cases are on the 90% LTV product, highlighting the importance of adapting criteria to meet needs of customers we previously would have been unable to help. Alongside that, reducing rates whenever possible has ensured that near prime borrowers enjoy better value than may be on offer at some lenders who specialise in more adverse credit.
That we have consistently seen record levels of interest and activity tells me two things. Firstly, that the demand is not just there for near prime, but is actively growing. And secondly, incorporating broker feedback into the design of the products means you’re better placed to support near prime borrowers.
The path back to prime
The issues that have pushed these households into the near prime category are not going away. While energy bills are heading downwards, for plenty the damage has already been done, and if they are to achieve their borrowing aspirations, they will need access to near prime finance.
However, it’s important for brokers to consider not just their client’s needs in the here and now, but in the years ahead too. After all, being categorised as near prime does not have to be long-term - as the borrower’s circumstances improve, they can regain access to prime finance.
It’s something we do as standard at Atom Bank, proactively offering near prime customers a prime rate when their existing rate matures, should they meet the eligibility criteria. We view our near prime rates as a transitional product, allowing customers to buy or move house now, knowing that there is a route out in the future. This isn't as commonplace as it should be, meaning brokers need to pinpoint the lenders who can not only help the client regain that status, but also deliver that prime finance when the time comes.
