The future of green buy-to-let lending

There has been a lot of speculation around EPC requirements for private rental sector (PRS) properties lately, and as a result, a growing body of research and analysis looking at this very topic and how landlords need to factor this into their future investment horizons.

What however is perhaps somewhat worrying is that, despite our industry covering the issue of future minimum EPC Level requirements for tenanted property regularly, this is not necessarily translating into the information landlords themselves have, or their understanding of what might be needed.

For example, Mortgage Advice Bureau (MAB) research recently revealed that nearly half of all landlords they polled were completely unaware that future measures designed to increase all PRS properties to a minimum EPC level of C would actually become law, and not just ‘guidance’.

Indeed, only 35% knew that Level C was likely to become the new minimum level to be able to let out a property, and a significant number – 18% - were not even aware of the potential changes at all.

Our own data gathered by our partners BVA-BDRC (Q4 2022) puts the figure at 9% of landlords not aware of the new regulations at all, but 66% fully clued up and ready, and 25% aware but not understanding the details.

Just recently, there have been rumours that what we were anticipating as a two-phase approach to EPC minimum requirements, would now be curtailed into one. So, rather than stagger the measures between new tenancies (by 2025) and existing tenancies (by 2028), all PRS properties will now need to be EPC C by the latter date.

That seems to be a more sensible option, in that it gives landlords some much needed time to get their properties improved if need be, and they could perhaps carry out any work over the years to come, rather than having to do it all at once, with all the potential cost this could require.

In recent months, when asked about how they might fund any work required to improve the EPC, many landlords have suggested they will rely upon savings, but when push comes to shove, I have a feeling that many will be looking to use their properties as a mechanism to fund any works, particularly if they need to be fairly substantial.

It's why advisers are able to play a very strong role here, working particularly with those landlords coming up to remortgage, to discuss the EPC of a property, what it will need to get to, how landlords might want to do this work and how they could use mortgage finance to fund it.

Now with the potential for a few years more to get this work done, landlords (and their advisers) should be able to plan a way through to ensure this work is affordable and they can utilise their properties/portfolios in order to help fund it.

There are clearly some other benefits for landlord borrowers to access in terms of getting the EPC to a level C sooner rather than later. The growth in ‘green’ mortgages – as offered by Foundation amongst other lenders - which offer better rates on those properties already at C, seems unlikely to stop anytime soon, and I doubt there are any landlords who would not want to secure a keener rate by having access to these products.

And, at some point in the future, I suspect there will be a far greater array of products specifically designed to help move landlords up the EPC scale.

At the moment, advisers with landlords coming up to remortgage should be having an EPC discussion with them. Interestingly, the MAB research showed that a vast majority of landlords know exactly what their property’s EPC is (86%), however other research from Knight Frank suggested the average amount to upgrade a property would be £9,260 – are landlords willing to dip into savings to fund this, and if not, then it makes sense to use mortgage finance to do so.

As mentioned, we’ll continue to offer green products across our borrower Tiers, plus on HMOs/MUBs/short-term lets because we’re aware this is an issue that affects all borrowers and all properties.

The time to talk about this is definitely now. A new Government, for instance, might well change the rules and/or bring forward the date to meet them, so this should not be an issue that advisers or their clients put on the back burner, especially when there are options to deal with it now.