Homeowners' running costs soar despite mortgage fall

Published on Monday 16 May 2011 15:14

CASH-strapped homeowners are facing further belt-tightening after research by the Bank of Scotland released today shows the cost of owning and running a home in Scotland has risen to its highest level since 2009, despite historically low interest rates.

Although mortgage payments have fallen by more than a fifth since 2008, rises in the cost of ten out of the 11 housing expenditure categories such as utilities and maintenance have driven costs up.

The findings follow last week's warning by economists at the Institute for Fiscal Studies that household incomes looked likely to have dropped by the largest amount since 1981 over the past 12 months.

Over the past year, the average annual cost associated with owning and running a home rose by 1.4 per cent (116) from 8,525 in March 2010 to 8,641 in March 2011.

In monetary terms, electricity and gas charges (up 102) and maintenance costs (up 33) were the biggest contributors to the overall rise in housing expenses.

Despite this increase, housing costs in March 2011 were still 1.8 per cent (159) lower than the average annual total in March 2008 (8,800).

Suren Thiru, housing economist at Bank of Scotland, said: "Household finances remain under pressure, with the significant drop in mortgage payments since 2008 mostly offset by increases in other household bills.

"Rising utility bills have been a clear driver behind this, along with increases in maintenance costs and council tax charges. The current strain on household finances is particularly concerning at a time when earnings growth remains weak."

Commenting on the role played by the biggest contributors to household costs - electricity and gas prices - Norman Kerr, director, at Energy Action Scotland, said customers were paying the price for the way the energy market operates and for government energy targets.

"We are now in a situation which is drastically different from the 'rock-bottom' prices of 2002 at the height of the deregulated energy market. At that time, there were approximately 13 suppliers competing for your business. But this could not be sustained, leading to mergers and acquisitions, and prices started to rise.

"The energy sector is a very complicated marketplace and Ofgem, the energy watchdog, is undertaking an investigation. Gas and electricity companies are buying supplies today to use in six to nine months' time, but it is not always clear how the final charges are determined.

"Also, consumers are having to fund the more ambitious targets set by government for carbon reduction and climate change. Approximately 88 annually is put on everyone's bill."Bank of Scotland economists said the lower housing expenses since 2008 was driven entirely by the substantial decline in mortgage payments.

The average mortgage rate paid by existing borrowers fell by 231 basis points between March 2008 and March 2011 - from 5.8 per cent to 3.49 per cent, helping to reduce the average annual mortgage payment (interest and capital repayments) by 21 per cent (796).

Mortgage payments were the only housing expense category to see a fall between 2008 and 2011, and also recorded the only decline over the past year.