April 2025 may seem like a long way off, but this date should stick in the minds of homeowners who own energy-intensive properties.
In three years, the government hopes to bid farewell to the multitude of drafty and neglected properties that plague some corners of the private rental sector. It plans to make it mandatory for homeowners to hold a minimum energy efficiency rating (EER) of C for each of their properties.
The proposals will apply to new rentals from 2025 and existing rentals from 2028, although there is speculation that the first stage could be pushed back to 2026.
Owners need to think about it now
However, with the current minimum EER requirement standing at just E, the cost of upgrading properties could reach thousands of pounds for some owners.
Good news in the recommendations is that the cost of necessary upgrades should be capped at £10,000 per property. This means that if an owner spends this amount and still does not get a C rating, they will be exempt.
Although the final rules are not expected to be announced for a few months, it is taken for granted that the C rating will be enforced, with suggestions that the rating stipulation could increase further by 2030, to B.
Brokers and lenders may have read countless articles about the proposed changes over the past few months, but that’s not necessarily the case for homeowners.
“I would say that two out of five owners know little or nothing about the energy performance certificate [EPC] changes, and that’s very concerning,” says Jeni Browne, Sales Director of Commercial Mortgages.
No one wants to come to mortgage only to find that there are no more products available
“In order to make financially wise decisions about how to finance the required improvements, owners need to think about it now.
“They need to make sure their costs aren’t higher because they’re rushing to get the job done, and also how they’re going to fund the costs in the first place,” she advises.
In many cases, it may be the responsibility of the owner’s broker to notify them of upcoming changes.
Aldermore Mortgage Distribution Manager Jon Cooper said while the majority of homeowners seem knowledgeable and understand why the changes are needed, inevitably some haven’t read about it yet.
“It’s important for the industry to educate owners so that it doesn’t surprise owners and they can start exploring what to do with their wallets,” he advises.
The cost of carrying out any repair work is capped at £10,000 but, for a landlord with multiple properties, this is potentially a substantial bill.
Browne estimates the costs at around £6,000 to upgrade a property from a D rating to a C rating.
“With the minimum requirements for the purchase-lease [BTL] properties currently only E, this may cost some owners more,” she warns.
EPC ratings will bring some challenges requiring management and planning, but most owners will likely find this manageable.
Browne adds: ‘Almost 60% of UK homes have a D rating or lower, so it’s likely that many homeowners will have at least one property in their portfolio in need of energy efficiency upgrades.’
Buy-to-Let Broker Director Matt Hardman says that traditionally to upgrade an EPC, work such as attic insulation, replacing an old boiler, upgrading windows more old buildings or installing energy efficient lighting or cavity wall insulation are areas where homeowners get the most “bang for their buck”.
Hardman adds: “On average this has been calculated at around £10,000 per property, but there will clearly be regional and property size variances which will have a big impact on this figure.
“Given that there are around 3.2million properties in the ‘Needs Improvement’ bracket, that’s around £32billion needed to bring the UK’s rental stock to where the government estimates that it must be – a not insignificant sum.”
Criteria expected to tighten to match new C-rating requirements from 2025
Cooper believes that bringing a rental property up to standard will, for many, not only take considerable funds, but also time.
“We are seeing a wide range of changes that may be needed, from simple things like replacing light bulbs with high-efficiency ones, to large and time-consuming projects like replacing central heating, rewiring, installing new boilers and double glazing in the windows,” he says.
“Large-scale renovations can take two to three years, so it may be necessary to develop a plan,” he advises.
How can brokers prepare clients for what can be a substantial and unexpected cost, and is now the time to do so?
“Owners should definitely think about this now,” says Browne.
It is important that the industry raises awareness so that this does not surprise the owners
“Depending on the amount of work required, they will have to look at their financing options. The main routes taken by our clients are a mortgage with capital increase, a new advance and a relay.
“Being smart about timing is key to saving money here. They’ll probably want to avoid breaking a mortgage term early if there are still high prepayment charges, but talking to a broker experienced should offer them a solution,” she says.
Instead of more competition in the green mortgage market, Browne would like to see more products aimed at helping homeowners make the changes.
“A growing number of lenders are now offering green mortgages, which reward owners of EPC A to C properties with lower interest rates. However, these are not reliably the most profitable products – there is no there isn’t enough competition in the market, and they only help homeowners after the work is done.
Depending on the amount of work required, owners will need to consider their financing options
“More specific options to help homeowners fund the cost of improvements would actually be more helpful right now, because that’s their primary concern,” she suggests.
After speaking to several lenders on the subject, Hardman believes they are preparing their more advanced proposals to help owners smoothly and quickly generate any capital needed for these upgrades in their portfolios.
“Landlords need to be very aware of this upcoming legislative mandate and start planning now how they will finance and realize these significant property improvements,” he says.
“Many of our owners have large wallets and so it’s a huge mission given the already difficult task of finding good craftsmen in a reasonable time frame,” he says.
Cooper, however, is confident the industry will rise to the task.
Two in five owners have little or no knowledge of the changes to the EPC, which is very concerning
“EPC ratings will bring challenges that require management and planning, but most owners will likely find it manageable,” he says.
“We have also seen, over the past year, significant house price inflation, which means capital growth for homeowners. This capital growth can be leveraged to support renovation costs to bring a property into compliance with EPC requirements or help seek funds for portfolio expansion,” he explains.
Failure to act
Perhaps one of the most important messages that brokers and lenders can convey to clients concerns the potential consequences for owners who do not make the right changes on time.
“Failure to bring BTL properties up to standard can lead to financial penalties of up to £30,000 and unleasable properties,” says Browne.
Options to help homeowners fund the cost of improvements would be valuable
She concludes by offering another caveat: “Currently lenders are not offering BTL mortgages for properties with an EPC rating below E, so it is expected that the criteria will tighten to match the new rating requirements. C from 2025.
“Nobody wants to come and make a mortgage only to find that there are no more products available,” she warns.