Planned legislation is putting pressure on landlords to make the homes they let out more energy efficient.
At the moment, all residential properties let to tenants in England and Wales require an energy performance certificate (EPC) rated E or above. Mortgage lenders won’t lend on buy-to-let (BTL) properties that don’t meet the legally required EPC standards.
These rules are set to change in 2025 when all properties let on a new tenancy agreement will require an EPC rating of C or above. The same rule will then be applied to existing tenancies from 2028.
Landlords have three years to make improvements
Well, that’s the plan. The recent chaos in the Conservative Party, coupled with the urgent need for the new administration to tackle inflation, could delay these proposals from becoming law.
According to the English Housing Survey, nearly four in 10 (38.3%) privately rented homes in England have an EPC rating of C or above, compared to 35.5% in the owner-occupied space. However, that means six out of 10 rented homes are below the level required from 2025 and need further investment.
If the deadline still stands, landlords have three years to make improvements to their properties so they meet the new standards.
The scale of the challenge is huge. Millions of rental homes will require some remedial energy efficiency work within the next six years in order to be legally let.
This is good news for tenants. Better energy efficiency will mean cheaper household bills in an era of record-high energy prices.
Six in 10 landlords consider green BTL mortgages
But Lodestone Mortgages and Protection director Craig Fish is sceptical about how many landlords have heard about the likely upcoming rule change.
He says: “I’m not convinced many landlords are aware of this requirement, unless they are a ‘professional’ landlord with, say, 10 or more properties.”
Research by Shawbrook Bank found that only a quarter of landlords’ portfolios contained properties that all met the EPC target of C.
Nearly four in 10 (38%) had properties that were all rated D or below; a proportion rising to 58% in London. If the proposals go ahead, landlords will not be able to begin new tenancies in these properties after April 2025.
The government has an overall target of making the UK’s housing stock carbon neutral by 2050. According to government figures, total greenhouse emissions from homes have reduced by 16% since 1990. However, homes remain responsible for 15% of greenhouse gas emissions, which increases to 22% if you include electricity consumption.
Some landlords will be in for large bills while others may be able to fund it from their surplus income
“The need for greener thinking applies to all housing stock, given the contribution it makes to our energy footprint,” says London & Country Mortgages associate director David Hollingworth.
“That’s perhaps even more true of the BTL sector where the shift to minimum requirements around energy efficiency is already in place in a bid to demand better minimum standards for properties that are let.”
Information sources
According to Shawbrook Bank, landlords regard lenders and mortgage brokers as key sources of information about EPC requirements. More than a third (36%) have spoken to a lender about energy ratings, and 26% have discussed the subject with a broker. However, four in 10 (41%) haven’t spoken to either about EPCs, despite their importance in lending decisions.
Specialist lenders are starting to consider innovation, including BTL refurbishment
Shawbrook found the key obstacle to energy efficiency improvements in the private rented sector was the cost of changes, specifically installing double glazing, insulation, heat pumps and boilers. More than four in ten (44%) landlords said affordability was the main barrier to improving their property’s EPC rating, rising to more than half (51%) of landlords with only one property in their portfolio.
Nearly two thirds (63%) of landlords told Shawbrook’s researchers they were considering selling their properties in the next five years due to the added burden of energy-efficient improvements.
“The cost to go from D to C on an EPC is estimated to be around £3,600 for a one-bedroom flat, and for a small house around £6,400. For a large, detached house, it could be as much as £12,500,” says Fish. “This is another ticking timebomb because these costs could be a barrier and result in many landlords exiting the market.”
Funding improvements
A study by Paragon found a worrying gap between the amount that landlords were willing to pay to meet the proposed EPC requirements and what the measures were likely to cost.
For many clients, when we send green illustrations, it’s a pleasant surprise that they qualify for a better rate
A survey carried out on behalf of the specialist mortgage lender found 77% of landlords were willing to spend up to £3,000 to upgrade each property they owned to a C rating. However, further analysis by Paragon found 78% of landlords would have to spend more than this amount.
Aria Finance managing director Lucy Barrett says: “Changes required to hit the necessary level of energy performance can vary greatly, depending on the property and its age, so some will be in for large bills while others may be able to fund it from their surplus income.
“Where rates are climbing so fast, it is likely to be a big hit to landlords looking to pull money out of their property portfolio, especially if their current mortgages are fixed and/or on lower rates.
“We see a lot of landlords raising money for all types of reason by way of a second charge so that the first charge is unaffected, and it could be there is a further surge of landlords looking to unlock equity this way.”
When a client is looking to purchase or remortgage a BTL, we now always ask at the start of our research what the EPC rating is
Several government schemes already exist to help landlords improve the energy performance of properties. For example, the Boiler Upgrade Scheme is available for both homeowners and those with second homes. The scheme offers grants of up to £5,000 towards the cost of an air source heat pump, and £6,000 for a ground source heat pump. It is also offering £5,000 towards a biomass boiler for properties in rural areas and those not connected to the gas grid in England and Wales.
The original Green Deal was a government scheme that provided loans to households to finance energy-efficient home improvements. The loan was designed to be paid back through the savings made on energy bills. Although the scheme closed in 2015, landlords can still get loans for energy-saving home improvements through approved Green Deal providers.
Green mortgages
A growing number of lenders now offer green mortgages for landlords. These may be in the form of a discount on standard BTL rates for more
energy-efficient properties, or a separate range of mortgages for homes that meet certain standards.
According to Shawbrook, nearly a fifth (18%) of landlords are making use of energy efficiency mortgage discounts, and nearly six in 10 (59%) would consider taking advantage of them in the future.
We see a lot of landlords raising money for all types of reason by way of a second charge
The Mortgage Mum senior mortgage broker Shelley Walker says: “Currently, the price differentials between the green and standard mortgages can be negligible when spread over the life of the mortgage, but it’s still a step in the right direction.
“We’re also seeing other partners across the industry support the changes we can access, including a service to audit EPC ratings within a property, providing a report with detailed guidance as to how to improve it, and potential cost savings for energy bills.”
Shawbrook Bank offers an energy efficiency discount for new BTL mortgage customers of up to 60bps on the bank’s arrangement fee for properties with an EPC rating of A, B or C. Shawbrook’s standard arrangement fee is 2% but this falls to 1.4% for properties with an A rating, 1.55% for those with a B rating and 1.75% for homes rated C.
This is another ticking timebomb because these costs could be a barrier and result in many landlords exiting the market
For new mortgages on properties where the EPC rating improves to at least a C during the term with Shawbrook, customers can apply for a partial refund of their arrangement fee, plus the cost of the new certificate (up to £100).
Lack of awareness
Some brokers report that not all landlord clients ask for a green mortgage because they are not aware of the product.
“When a client is looking to purchase or remortgage a BTL, we now always ask at the start of our research what the EPC rating is. This can easily be checked on the government website by the adviser in seconds,” says XpressMortgages mortgage and protection adviser Rachel Lummis. “If it’s an A to C, we know we can look at green products.
I’m not convinced many landlords are aware of this requirement, unless they are a ‘professional’ landlord
“For many clients, when we send green illustrations, it’s a pleasant surprise that they qualify for a better rate. We are rarely asked by clients to look at green mortgages for them. It’s not usually something either they are aware of or that is in the forefront of their mind when seeking a mortgage.”
Paragon is another lender offering green incentives to landlords. It has a product range specifically for rental properties with an EPC rating of A, B or C. It also offers further advance products for landlords who plan to spend the money on boosting the energy efficiency of their properties.
Barclays’ green BTL mortgages focus on new-builds, with green products available only to investors buying a new-build property directly from the builder or developer. New-build homes have a predicted energy assessment (PEA) before they’re finished – if a property has a PEA of 81 or above, or is in energy efficiency bands A or B, investors may get lower rates on some fixed-term mortgages.
Currently, the price differentials between the green and standard mortgages can be negligible when spread over the life of the mortgage, but it’s still a step in the right direction
NatWest also offers green BTL mortgages that are discounted two- and five-year fixed rates. To be eligible, landlords must be buying or remortgaging a property with an EPC rating of A or B.
Connect Mortgages director Jane Benjamin says: “Specialist lenders are starting to consider innovation, including BTL refurbishment, which offers a single solution to help remove uncertainty around funding refurbishments, including light refurbishment, cosmetic improvement and EPC improvement. The latter specifically focuses on improving the energy efficiency of the property.”
Industry support
It’s clear the mortgage industry has a significant role to play in supporting landlords to make EPC improvements. With the soaring cost of living foremost in the minds of both private tenants and landlords, energy prices are a source of stress for many. However, the energy crisis has, at least, increased awareness of the need to improve efficiency and reduce households’ consumption of electricity and gas.
The need for greener thinking applies to all housing stock, given the contribution it makes to our energy footprint
Landlords may be tempted to defer energy efficiency improvements while they await confirmation of the statutory requirements from the new government. But they ought to take action now, both to protect their investment and to do their bit for the planet.
