Could energy bills overtake mortgages in the next five years?
In an interview with the Sunday Telegraph, Ian McCaig, chief executive of small gas and electricity supplier First Utility, argues that energy bills could overtake mortgage costs “over the next five to 10 years”. The Sunday Telegraph headlines the article “Energy bills ‘could overtake mortgages in five years’.” It’s a great headline, but is it right?
The article says:
“Analysis by First Utility shows that UK dual-fuel bills have risen by an average of 8.5pc a year over the last five years to reach current levels of £1,420.
“If they keep rising at the same rate, then by 2025 they would reach £3,761 – higher than current average annual mortgage repayments in places such as Stoke-on-Trent and higher than average repayments in Liverpool by 2029.”
There are two things to note here.
First, the projection cited in the Sunday Telegraph refers to bills in 12 years’ time, not five.
Mortgage repayments are different in different parts of the country, but the Council of Mortgage Lenders told us that the average mortgage-owning household currently pays £8,136 per year (or £678 a month) in repayments.
Ofgem calculates the average energy bill in May 2013 at £1,420. Assuming for the sake of argument no growth in mortgage repayments, for the average energy bill to top the average mortgage payment within five years would require annual growth in energy bills of an eye-watering 42 per cent.
If you live in Stoke, energy bills of £3,761 a year would be bigger than your mortgage – as suggested in the Sunday Telegraph. Your energy bills would need to grow by 21 per cent a year for five years to beat your mortgage.
Secondly, the calculation is based on an assumption that energy bills will continue to rise as quickly over the next decade as they have over the past five years.
They might – but then again they might not. We asked First Utility if we could see its analysis of energy bill increases. So far it hasn’t provided any more information, although it confirmed to us that it calculated that households will be paying £3,761 per year on their energy bills by 2025 by assuming an 8.5 per cent rise in bills in each of the next ten years.
First Utility has promised to provide a press release later in the afternoon with more detail, and we’ll update this blog if and when that happens.
Increasing bills
It’s generally agreed that consumer energy bills are likely to keep going up over the next couple of decades. But it probably won’t happen at a uniform rate. And it certainly won’t happen fast enough for energy bills to outpace mortgage payments within five years.
The Department for Energy and Climate Change (DECC) predicts that bills will only go up by about £93 by 2020, based on the assumption that government energy efficiency measures will reduce the impact of price rises on consumer bills by about £450.
Given that energy efficiency policies like the Green Deal and ECO have been criticised for failing to deliver the required savings, this is probably an optimistic projection.
Trends in energy bills will be a product of trends in energy production and consumption – including changes to the price of gas, the effectiveness of energy efficiency measures, and wider geopolitics.
If energy bills keep going up, while mortgages stay flat, then sooner or later you will pay more for energy than for your house. But even in an idealised world, your mortgage will continue to be more than your energy bill for rather longer than the next five years, unless something really, really weird happens.