The cost for some landlords to make their properties more energy-efficient is set to run into thousands and if they haven’t already, they will soon need to start thinking about how to fund any upgrades.
Although we are still waiting for the Government to publish the final rules, it is expected landlords won’t have long to carry out the changes.
It is currently proposed they will be given until December 2025 to make sure their properties carry an Energy Performance Certificate (EPC) of at least a C rating for all new tenancies and until December 2028 for all existing ones.
According to the National Residential Landlords Association, across England, over 58% of private rented households have an energy rating below a C, meaning some landlords will have a large task ahead.
Recent research from online mortgage broker, Habito, estimates the cost of upgrading an EPC from D to C will be up to £3,653 for properties under 55m², £6,400 for properties under 100m² and £12,540 for properties from 100-200m².
While the amount landlords need to spend is expected to be capped at £10,000 per property, for those with several properties, the cost could be substantial.
As awareness grows around the EPC changes, so too will client enquiries about how to fund the upgrades. Recent industry research shows 27% of landlords still do not know the energy-efficiency rating of their property – something which is likely to change as the 2025 deadline approaches.
December 2025 will come around quickly and is not a huge amount of time for landlords to have their properties assessed and employ somebody to carry out the work, especially as demand for this type of work is likely to increase.
As well as the cost of the work involved, there could also be a potential loss in rental income if tenants need to vacate the property while work is carried out.
Many landlords are likely to start factoring this into their projections now and will be looking at their options.
If they have remortgaged in the last few years, there is a strong chance they could be on a five-year fixed rate.
The take up of 5-year fixes has been particularly high in the buy-to-let (BTL) market since January 2017, when the Prudential Regulation Authority introduced stricter stress tests for mortgages.
Lenders can however apply a less vigorous stress test on rates of five years and over, meaning landlords can potentially borrow more.
In quarter three of 2019, 70% of BTL mortgages were taken out on a 5-year fix basis, according to The Mortgage Business’s BTL Mortgage Tracker.
Landlords who are halfway through a five-year fix may be reticent to remortgage if they face paying a large Early Repayment Charge (ERC) – especially if they have a 5-year fix across a substantial portfolio.
The recent increases in the Bank of England base rate may also act as an incentive for landlords to stick with their existing fixed rate if they remortgaged when rates were low.
A second-charge mortgage could therefore be a good choice for landlords who are looking to raise additional funds.
They will be able to keep their existing mortgage in place and take out a new rate on a second charge.
A second charge might also be an option for landlords who have seen their credit score reduce since the pandemic or may have experienced a change in financial circumstances which calls for a more flexible approach to their finances.
The EPC proposals for landlords are also widely expected to cross over into the residential sector at some point as the Government looks to upgrade the UK’s entire housing stock.
This means homeowners as well as landlords could also soon be looking at ways to fund such improvements and turning to brokers to advise them of their options. This makes it essential advisers are knowledgeable about all the funding options open to them – such as a second charge.
Kerri Pender is operations director at Evolution Money
