April 2025 may seem a long way off, but this date should be etched on the minds of landlords who own energy-inefficient properties.
In three years’ time, the government hopes to bid farewell to the raft of draughty and neglected properties that plague some corners of the private rental sector. It plans to make it compulsory for landlords to hold a minimum energy efficiency rating (EER) of C for each of their properties.
The proposals will apply to new tenancies from 2025 and existing tenancies from 2028, although there is speculation the first stage could be pushed back to 2026.
Landlords need to be thinking about this now
Nevertheless, with the current minimum EER requirement standing only at E, the cost of bringing properties up to scratch could run into thousands of pounds for some landlords.
One flicker of good news in the recommendations is that the cost of making necessary upgrades is expected to be capped at £10,000 per property. This means, if a landlord spends that sum and still does not achieve a C rating, they will be exempt.
Done deal
Although the final rules aren’t expected to be announced for another few months, it is seen as a given that the C rating will be applied, with suggestions the rating stipulation may increase further by 2030, to B.
Brokers and lenders may have read countless articles on the proposed changes in recent months, but this isn’t necessarily the case for landlords.
“I’d say two in every five landlords have little or no awareness of the energy performance certificate [EPC] changes, and that is highly concerning,” says Mortgages for Business sales director Jeni Browne.
No one wants to come to remortgage only to find there are no longer any products available
“In order to make financially savvy decisions about how to fund any required improvements, landlords need to be thinking about this now.
“They need to ensure their costs aren’t higher because they’re rushing to get the job done, and also how they are going to fund the costs in the first place,” she advises.
In many instances it may fall to the landlord’s broker to inform them of the up-and-coming changes.
Aldermore head of mortgage distribution Jon Cooper says, while the majority of landlords seem well informed and understand why the changes are needed, inevitably some have yet to read up on the subject.
“It’s important that the industry spreads awareness so this doesn’t surprise landlords and they can start exploring what needs doing with their portfolios,” he advises.
Scale of the task
The cost of carrying out any remedial work is capped at £10,000 but, for a landlord with multiple properties, potentially this represents a substantial bill.
Browne estimates costs of around £6,000 to lift a property from a D rating to a C.
“With the minimum requirements for buy-to-let [BTL] properties currently only E, it may cost some landlords more,” she warns.
The EPC ratings will bring some challenges requiring management and planning, but likely most landlords will find this manageable
Browne adds: “Almost 60% of UK homes have a rating of D or lower, so it’s likely many landlords will have at least one property in their portfolio requiring energy-efficiency improvements.”
The Buy-to-Let Broker director Matt Hardman says, traditionally, to upgrade an EPC, works such as loft insulation, replacing an old boiler, upgrading older windows, or installing energy-efficient lighting or cavity wall insulation are areas where owners get the most “bang for their buck”.
Hardman adds: “On an average basis, this has been calculated to be around £10,000 per property, but clearly there will be regional and property-size variances impacting heavily upon this figure.
“Given there are around 3.2 million properties in the ‘Needs improvement’ bracket, that’s around £32bn required to get the UK’s rental stock to where the government feels it needs to be — a not insignificant sum.”
It’s expected that criteria will tighten to match the new C-rating requirements from 2025
Cooper believes getting a rental property up to standard will, for many, take not only considerable funds but also time.
“We’re seeing a wide spectrum of changes that may be required, from simple things, like replacing lightbulbs with high-efficiency ones, to substantial and time-consuming projects, like replacing the central heating, rewiring, the installation of new boilers and double glazing the windows,” he says.
“Large-scale renovations can take two to three years to complete, so mapping out a plan may be necessary,” he advises.
How can brokers prepare clients for what may be a substantial and unexpected cost, and is now the time to do it?
“Landlords should undoubtedly be thinking about this issue now,” says Browne.
It’s important that the industry spreads awareness so this doesn’t surprise landlords
“Depending on how much work is required, they’ll need to look at their finance options. The main routes our clients are taking are a remortgage with capital raise, a further advance and bridging.
“Being smart about timing is key to saving money here. They’ll probably want to avoid breaking a mortgage term early if there is a hefty early repayment charge still in place, but talking to an experienced broker should offer them a solution,” she says.
Instead of increased competition in the green mortgage market, Browne would like to see more products aimed at helping landlords carry out the changes.
“An increasing number of lenders now offer green mortgages, which reward landlords with EPC A-to-C properties with lower interest rates. These are not reliably the most cost-efficient products, though — there’s not enough competition in the market. And these help landlords only after the works are complete.
Depending on how much work is required, landlords will need to look at their finance options
“More specific options to help landlords fund the cost of the improvements would actually be more valuable right now, as that’s their main concern,” she suggests.
After speaking to several lenders on the subject, Hardman believes they are gearing up their further-advance propositions to help landlords smoothly and swiftly generate any capital required for these upgrades across their portfolios.
“Landlords need to be very aware of this upcoming legislation mandate and start planning now for how they will finance and achieve these important property upgrades,” he says.
“Many of our landlords have sizeable portfolios and therefore this is a huge mission given the already tough task of finding good tradesmen in a reasonable timescale,” he states.
Cooper, however, is confident the industry will rise to the task.
Two in every five landlords have little or no awareness of the EPC changes, and that is highly concerning
“The EPC ratings will bring some challenges requiring management and planning, but likely most landlords will find this manageable,” he says.
“We’ve also seen, in the past year, notable house-price inflation, and this means capital growth for landlords. This capital growth can be leveraged to support any retrofit costs to bring a property up to EPC requirements or assist in seeking funds for portfolio expansion,” he explains.
Failure to act
Perhaps one of the most important messages that brokers and lenders can convey to clients is about the potential consequences for landlords who fail to make adequate changes in time.
“Failing to bring BTL properties up to standard can result in financial penalties of up to £30,000, and unrentable properties,” says Browne.
Options to help landlords fund the cost of the improvements would be valuable
She concludes by offering a further note of caution: “Currently, lenders don’t offer BTL mortgages for properties with an EPC rating under E, so it’s expected that criteria will tighten to match the new C-rating requirements from 2025.
“No one wants to come to remortgage only to find there are no longer any products available,” she warns.
