29 March 2023

EPC Provides the Perfect Open Door Conversation for Advisers

By Steve Cox, Chief Commercial Officer at Fleet Mortgages

When it comes to the anticipated EPC regulations for private rental sector (PRS) properties, it feels like we’ve been talking about them for a long time without actually seeing the proposed rules turn into anything concrete.

The industry is certainly acutely aware that the proposals are for a two-stage process – that is, from 2025 all newly-tenanted properties will need to have an EPC of C or above, while existing tenancies will have until 2028 to reach that point.

For advisers, regardless of the tortuous process to get to the point where the EPC minimum standards become law, this is not likely to be something that will go away.

Indeed, we’ve seen over the past 12 to 18 months that landlords are increasingly knowledgeable about the rules – no doubt with advisers’ help – and that it is becoming more of a factor for them when they weigh up what they have in their existing portfolios and what they are willing to accept when adding to them.

For example, recent research from Finbri showed that almost half of all UK landlords now think EPC ratings are either ‘very important’ or ‘extremely important’, and that’s a view that is increasingly echoed by tenants themselves who know that a more energy-efficient property is going to mean less costly energy bills.

Despite some research suggesting that too many landlords are not aware of what is likely to be coming over the horizon, we as a buy-to-let lender, definitely sense a more educated and informed landlord population, and advisers can certainly add to this in terms of their dealings with landlords going forward.

The point to be made here is that it’s likely that at least two-thirds of the UK’s PRS properties are not currently at an EPC level of C or above. While 2025/2028 might seem like a fairly long time to (literally) get the house in order, discussions need to be had right now around how this can be done, and the way landlords intend to fund it.

Some landlords may be able to get their properties to this level without a substantial amount of work or cost. As advisers, you can check the EPC rating of a property by visiting www.gov.uk/find-energy-certificate. Not only will you find the current EPC itself as well as the rating, but you’ll also find a list of suggestions on how to improve the property’s energy rating and the potential costs involved.

Armed with this information, advisers can talk to each individual landlord not just about one property but every single one in their portfolio. They will need to have a clear view of what is required not just for a property they may be currently remortgaging, for example, but also what they will potentially need to do in the future for the rest of their portfolio.

And this is pertinent because funding the changes which are necessary – for those properties which are currently D and below – is going to be a major consideration.

I read recently that a number of landlords intend to fund upgrades using their savings, but I wonder when the time actually comes, will they really want to dip into their reserves? Or will they instead be looking at financing this in other ways? For example, via a remortgage where they can capital raise and potentially secure the money from one property to complete the work on many others?

Again, the earlier you have this conversation with your landlord borrowers, the earlier you can put in place a financial plan to allow them to prepare and to have confidence in their ability to make the changes necessary, keep invested, and keep letting out the properties they have.

Now, when it comes to specific products which support this, Green mortgages are available. However, these tend to be products which reward those who have previously improved their properties, or whose properties already have an EPC rating of C or above - with lower rates.

There’s absolutely nothing wrong with this – and Fleet offer both Green five-year fixes and Trackers for landlord borrowers who are in this position. But what we also plan to do is support those whose properties are not yet at this EPC level and help provide the finance that will allow landlord borrowers to carry out the work to get to the necessary standards, and then provide that Green reward when they get there.

It is still a work in progress but I think it’s important to acknowledge that this is the start of the Green mortgage journey within buy-to-let rather than anywhere near the end destination.

Overall, it’s important to start having these conversations with landlords right now, particularly those who are coming up to refinance or considering a further purchase. The Green agenda is likely to play a major role in their decision process so arm them with the EPC information and the suggested upgrades and then work from this in terms of deciding how they might fund it.

There is definitely a need to know around this, and advisers are in the perfect place to deliver on it.

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