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Landlords Face Five-Year Deadline for EPC Goals: Exploring Funding Solutions and the Challenges

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Changes to proposed EPC legislation

Buy-to-let investors may soon find themselves facing a new challenge: meeting EPC energy efficiency standards within a five-year timeline or risk facing fines of up to £30,000. With the government expected to require landlords to enhance the energy performance of their properties by 2028, these proposed plans raise several questions about how these improvements will be funded, the role lenders should play in the process, and the long-term impact on both landlords and tenants.
As previously mentioned, landlords may soon be prohibited from renting out properties unless they upgrade them to meet EPC energy efficiency standards within a five-year timeframe. The government is poised to announce that landlords will have to invest significantly in improving the energy performance of their properties by 2028 – or face a fine of up to £30,000. It appears that the government intends to require around two million landlords to raise the Energy Performance Certificate (EPC) rating of their properties to at least a C standard in order to help decrease the country’s carbon emissions. As a result, buy-to-let investors may have to invest thousands in property improvements, such as insulation and eco-friendly installations like heat pumps and solar panels, to boost energy efficiency.

At present, all privately rented homes in England and Wales must meet a minimum EPC rating of band E before they can be rented out. Previously, the government had proposed a 2025 deadline for new rental properties to achieve an EPC rating of at least C, with a 2028 deadline for all other rented properties. However, over two years after the initial consultation in early 2021, it now seems that the 2028 deadline will apply to all rental properties, as the original target was deemed unattainable and potentially causing landlords to sell their properties.
An industry insider has revealed that approximately 3,500 properties would need to undergo upgrades daily to meet the ambitious 2025 deadline, describing it as a “colossal challenge.” The government has been collaborating with banks on the proposal, setting a maximum spending cap of £10,000 per property, irrespective of whether the C rating is achieved. Landlords of higher-value properties could end up paying more, as it is believed that the cap may now be implemented on a sliding scale, starting at £5,000 and increasing in accordance with the property’s rental value.
Concerns have been raised that older properties will demand significantly higher investments for upgrades. England houses more than half (52%) of its homes built prior to 1965, making it one of Europe’s oldest housing stocks. An insider in the property sector remarked, “The private rental sector will struggle without significant investment to help develop a supply chain and finance the most challenging retrofits.”

Solutions

Chris Norris, Policy Director for the National Residential Landlords Association, stated, “We believe that rental properties must be as energy efficient as possible. However, this can only happen if the government introduces bold, practical policies that consider the financial burden many landlords face when retrofitting their properties.” He emphasized the importance of a pragmatic approach from the government, setting achievable and realistic energy efficiency targets.
Many argue that tax breaks and incentives are necessary to encourage buy-to-let (BTL) investors to invest in energy performance certificate (EPC) improvements. However, increasing global interest rates present challenges, as they affect rental income cover ratios and the amount investors can borrow. Traditionally, investors have been comfortable spending on improvements that increase property value, and EPC improvements could have a significant impact on house prices as the deadline approaches. Buyers will likely factor in potential fines or required work when making offers on properties.
For these plans to be effective, lenders need to stop “greenwashing” and genuinely offer products that cater to these needs. The current selection of green mortgage options is embarrassingly limited and often seems like mere clutter when sourcing products. Borrowers who are fortunate enough to own an A-C rated property might see a meager 0.05% reduction in rates, saving only a few pounds a month – hardly an incentive.For example, consider a £200k property with a 75% interest-only 5-year mortgage deal. The total cost of the best mortgages, in terms of interest and fees, is around £14,370. In comparison, the same selection for A-B rated EPC properties – a challenging standard to achieve without significant investment – comes in at £14,945, which is even more expensive!

Some lenders have attempted to provide flexibility, albeit without cost-effective borrowing, by permitting further advances at prevailing rates for properties undergoing EPC improvements. However, the process is so complex that it remains somewhat unappealing. Nevertheless, it is a step in the right direction.
What is truly needed is a coordinated approach between the UK government and lenders. Following the global financial crisis, similar schemes were implemented, allowing affordable funding to flow through lenders to stimulate the market. By underwriting the risk to lenders, governments wouldn’t have to pay directly for the improvements, but only step in where loans are not fully repaid. Additionally, the impact of green systems on tenants and the amounts they are willing to pay has not been fully considered.
If heat pumps or solar panels effectively reduce utility costs for landlords, allowing them some control, we may see more rental agreements that include utilities. This would be beneficial for the income cover ratio calculation, as it would enable investors to borrow more. Perhaps lenders should consider the rental uplift potential of renewables, allowing utility costs to be rolled into the rental price, saving tenants money, increasing what the investor can borrow, and enhancing the desirability of the property.

Unfortunately, with a distracted government focused on producing election-winning soundbites rather than investing in the long-term health of the country, a comprehensive solution to this issue seems unlikely. Landlords generally view the EPC changes as another stealth tax and a way to generate profits for private businesses, and from my perspective, they are largely ignoring these deadlines. As many 5-year mortgage deals recommended today will extend beyond the EPC deadline, landlords must be prepared for potential fines, early repayment charges, or costly loans.
In conclusion, while the government remains committed to its targets, it acknowledges that they are neither manageable nor realistic. There is no support for landlords, many of whom are not as wealthy as assumed, and who are merely trying to provide security for their families. Lenders’ half-hearted attempts to address the issue are largely seen as hollow marketing ploys, and the expectation that landlords will simply dig deep when the time comes – despite their inability to afford £10k+ bills for advanced improvements – is misguided. Landlords should start considering simple improvements that can be made now if they plan on fixing mortgages where the end date falls after the EPC deadline.

Picture of Author: Stuart Phillips

Author: Stuart Phillips

Fully CeMap qualified, Directly Authorised by the FCA and with over a decade of experience, Stuart has a wealth of experience in both specialist BTL and residential mortgages.

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