Five-year fixes and EPC upgrades
Paul Brett is managing director of intermediaries at Landbay
I took part in a buy-to-let panel session at the London Mortgage Business Expo recently and we were discussing Energy Performance Certificates (EPCs).
The government has proposed that all rental properties should have an Energy Performance Certificate of at least band C. The timescales for this are 2025 for new tenancies and 2028 for existing tenancies.
A broker in the audience asked a very good question about how they should advise their clients.
The dilemma is how can brokers advise clients to take out a 5-year fixed rate if they have to upgrade their property by 2025 and need to raise finance to do so? The client will be tied into a 5-year term and if they redeem, they will incur early repayment charges.
They could advise their client to take a 2- or 3-year product or a tracker but 5-year fixes are most popular at the moment.
Are clients aware of government EPC proposals?
The first thing I would say is that it is a good idea for brokers to discuss these EPC proposals with their clients to ensure they are aware of them. It is then up to the landlord to decide what he or she does with that information.
It should be noted that these dates of 2025 and 2028 are not set in stone, at the moment they are proposals. The government has said that it wants all homes, not just rented properties, to be C rated by 2035, “where practical, cost-effective and affordable”.
But there is a problem here in that it will be extremely difficult to get every home in the UK C rated. So much of the housing stock is old and certainly not energy efficient.
Rightmove conducted research analysing the EPCs of 15 million properties. It concluded that nearly 1.7 million homes in England and Wales would not be able to reach a C rating, even if improvements were made.
Current requirements and exemptions
The current requirements of the Minimum Energy Efficiency Regulations are that all privately rented properties in England and Wales must be at least E rated.
It is possible for landlords to apply for a five-year exemption in certain cases. This includes properties where work cannot be carried out without appropriate consent, or improvement costs will exceed £3,500. The government could increase this figure as it is unlikely, for example, to cover the cost of new heating or windows.
Landlords who have recently bought a property can apply for a temporary six-month exemption to give them time to complete the work. All exemptions must be recorded on the UK government’s PRS exemption register.
Opportunity to upgrade
However, for forward looking landlords there is an opportunity to buy poorer quality housing and add value to it.
The advantages of upgrading property are that it will attract higher rent and arguably better quality tenants. Plus, landlords would be eligible for a discounted green mortgage if the property has an A, B or C rated EPC.
Back to the original question the broker posed. It looks likely that landlords will have to face the issue of EPC C rated properties at some point.
Landlords need to be aware of this and decide whether they upgrade their properties sooner or later or indeed if they qualify for an exemption, which will need to be relooked at five years later. Brokers can play their part by ensuing their clients know about this.