Foreseeing the potential scale of work the new EPC guidelines could create, we published our second ‘Confronting the EPC Challenge’ white paper last year – which revealed a significant gap in terms of landlord’s knowledge of the proposed regulations. The report also highlighted the ways the industry can support landlords when it comes to creating a more sustainable rental market.
As property market professionals, and the trusted advisers of landlords, mortgage brokers are uniquely placed to help address this knowledge gap and offer support to landlords around the potential changes, and on improving their properties overall.
More imminently, it is also important to note that from 1 April this year it will become unlawful for a landlord to ‘continue to let’ a property with an EPC rating below E, unless they have made all possible cost-effective energy efficiency improvements up to the current cap of £3,500 or one of the exemptions applies. This raises concerns given that our latest research shows that only 43% of landlords surveyed know the EPC rating of all their properties and 23% either don’t know or are not sure, potentially leaving them exposed to fines anywhere between £5,000 and £150,000 for continuing to let a non-compliant property.
The remaining knowledge gap around the potential upcoming EPC regulatory changes
Looking forward again to the proposed EPC regulations, as mentioned above, the second iteration of our ‘Confronting the EPC Challenge’ report showed that the knowledge gap remains high around the new proposed guidelines. 11% of landlords still say they don’t know anything at all about the proposed requirements, and while 78% say they have now heard of them, 37% of this group admit to knowing only ‘a bit’. In addition, our research shows that just a quarter of landlords’ portfolios contain properties that all meet the EPC target of C and nearly four-in-ten (38%) have properties that are all rated D or below. 31% of landlords said that the lack of information on how and what improvements to make was one of the key barriers, and that improved guidance would be the most effective way to help them understand and make the necessary changes. Brokers can play a role of real importance here, by actively opening conversations with their clients and providing information and advice. Pointing these individuals to the government pages where they can both check their properties existing EPC rating and book in an EPC inspector.
Cost of living impact on landlords’ sustainability improvement plans
Last year’s sharp rise in energy costs, alongside the ongoing inflationary pressures have squeezed everyone, not least renters, and our research shows that 21% of tenants have spoken to their landlords about making energy efficiency improvements and 58% of would be less likely to rent a property with a rating of D and below. All of these factors have provided the impetus for many landlords to speed up their plans for making improvements, with 54% making improvements over the first half of last year, 63% of which brought their plans forward. 48% of landlords see lower energy costs as the key benefit, mindful of the attractiveness of efficient homes to tenants. In addition, 75% of landlords have taken steps to support tenants during the cost-of-living crisis with 25% freezing rents, and 22% even going so far to reduce rents for struggling tenants.
The remaining barriers
As one might expect, the key obstacle to energy efficiency improvements is the cost of changes, with 44% of landlords saying affordability worries were holding them back. On average, landlords estimate the cost of bringing a property with a rating of D or below up to the C standing at just under £2,000. However, 9% expect the work to cost more than £5,000 and 33% are concerned that pressures linked to supply chain disruption will drive these costs higher.
Under the current rules, most properties must meet the E standard on the EPC scale. The cap on the amount a landlord must spend up to for making improvements to reach E currently stands at £3,500. As part of the proposed EPC changes, this cap has been mooted to be raised to £10,000, however 70% of landlords believe this is too high, and 35% think it would need to be lowered if the industry is to meet the proposed deadlines. In terms of meeting the costs, the 57% of landlords who have already made energy efficiency improvements have used their cash savings, followed by 30% borrowing on credit cards, and 24% taking out a personal loan. 17% of landlords also re-mortgaged, while 16% took out a business loan, a further 16% utilised equity release, 14% a second charge mortgage and 12% used a bridging loan to fund work.
Overall, more than 63% of landlords say the burden of EPC improvements makes them more likely to sell their properties in the next five years largely as a result of cost concerns and the additional administrative load. On the face of it, this could potentially have a worrying more long-term impact on the availability of properties in the private rental sector, however we believe this is an opportunity for the professional landlord (those with a portfolio of four or more properties) giving them the ability to add to their stock.
Work with a flexible lender to support their financing needs
Landlords come in all different shapes and sizes and, given the potential weight of the financial burden these rule changes could place on the market, it is important for brokers to be up to date with the best financing options available to property owners that most suit their needs. Traditional methods of financing such as conventional mortgage and re-financing options are still popular, as is taking out a personal loan to complete upgrades.
Other products that are increasing in use include second charge mortgages and bridging loans. Often known as ‘Secured Loans’, a second charge can allow a landlord to secure a second mortgage against their residential property and fund improvements on an investment or buy-to-let property – without the need to remortgage. Bridging loans, on the other hand, can give landlords a quick cash injection with flexible terms to help with anything from a new property purchase to refurbishment work.
Many lenders are also beginning to offer discounts to landlords that can provide evidence their property, or properties, have met EPC requirements. These mortgage products can incentivise landlords to make EPC improvements, or reward them in the long-run – giving them preferential rates, partial refunds of arrangement fees or even cashback in some cases.
Conclusion
Mortgage brokers who actively engage, listen and provide sound advice to landlords will go a long way in ensuring as many properties as possible reach the desired C grade by 2025, whether the regulation kicks in or not. Not only will this provide a larger supply of housing desirable to tenants it will also help the planet and promote a sustainable rental market.
Source: Financial Reporter