EPC Ratings May Make Landlords Mortgage Prisoners

Landlords may become mortgage prisoners as borrowing against energy-inefficient homes becomes harder as buy-to-let lenders rally to a government call to boost their green credentials and EPC ratings. 

Nationwide’s The Mortgage Business is the latest lender to refuse 75% plus loan-to-value loans against rental homes with an Energy Performance Certificate rating that fails to meet  C or more on the application date. 

The condition locks borrowers out of a swathe of competitive high LTV low rate fixed-term mortgages. Around one in five lenders offer cheaper rates to borrowers with homes registering an EPC rating of C or higher. The rate is generally shaved by 0.05%.

Lenders set their standards

The UK’s third-ranked largest buy-to-let lenders Barclays, NatWest, Kensington and Paragon feature among the lenders with green incentivised offerings. Lenders do not apply an industry standard to the EPC terms and conditions. Each is free to set a pass or fail threshold. TMW is Britain’s second-largest buy-to-let lender with a 13% market share, according to the latest trade body UK Finance data.

“The Department of Business, Energy and Industrial Strategy (BEIS) is leading the ‘Improving the energy performance of privately rented homes’ consultation, which is currently looking to increase the EPC requirement to a C rating for all tenancies by 2028,” said a TMW spokesman. “To support a key segment of the buy-to-let market, while recognising future ambitions across the private rental sector to achieve more energy efficient homes, TMW’s range of 80% LTV products will be available where a property has an EPC rating of C or above.”

1.7m homes will never score an EPC C-rating

Recent research from the online property finding portal Rightmove reveals that 1.7 million of the UK’s 4.5 million private rented homes may never achieve an EPC rating of C or higher. Since April 1 2020, the law has banned landlords from renting out homes rated at less than E. More lenders taking the TMW stance could mean around half of the buy-to-let properties with an EPC rating of D or lower suffer a double whammy in 2028.

• First, lending terms will stop landlords from raising funds against their rental properties to upgrade their EPC rating
• Second, landlords must withdraw the properties from the rental market to abide by the Government’s green homes targets.

BEIS is marshalling this two-pronged approach to urge landlords to improve the energy performance of their properties. The aim is to meet Prime Minister Boris Johnson’s net-zero carbon emissions target by 2050 at the latest. BEIS believes buy-to-let lenders can influence landlords to consider green upgrades by making them consider energy efficiency when buying or remortgaging rental properties.

What is an EPC rating?

An EPC is a report that rates a home’s energy efficiency against a set of standards drafted by Government experts. An A rating is the highest and G the lowest. Landlords cannot rent out homes with a rating lower than E. The Government wants landlords to boost the energy efficiency of their properties to a C rating by 2035. However, The Climate Change Committee is pressing for the deadline to move forward to 2028. From April 2028, EPC rules may stop landlords from renting out homes with an EPC rating lower than C. 

To upgrade a home, landlords must invest in improvements, like fitting loft, underfloor or cavity wall insulation; upgrading to double or triple glazing; draught-proofing or hot water tank insulation. BEIS says tenants save an average of £300 a year on energy costs in a C-rated home compared with a D-rated home for an outlay of around £4,000.

How much do green improvements cost?

Many of the improvements recommended in an EPC report are relatively cheap. Insulating a hot water cylinder or switching to low-energy lighting are priced at less than £50 each, while improving loft insulation costs no more than £250. Rightmove’s property data director Tim Bannister points out that homes with the lowest ratings need significant investment to climb the ratings.

Where homes struggle to get an EPC C-rating

According to the Rightmove research, these are the ten places with the highest proportion of homes with an EPC D rating or lower. The last column shows the percentage of homes unable to meet a C-rating even if landlords spend to upgrade energy efficiency.

Green Mortgage FAQ

How do you check a home’s EPC rating?

The EPC register allows free searches by postcode, street, town, or registration number.

Can I let an E-rated home?

Yes. Current rules allow the letting of an E-rated home, but the Government wants to raise this to a C-rating by 2028.

Does every rented home need an EPC E or above rating?

No. The rules allow some exemptions:

• the property is unable to be brought up to the standard after £3,500 has been spent on recommended energy improvements
• the tenant refuses consent (exemption ends when the tenant refusing access leaves the property)
• the landlord is unable to obtain consent from a third party
• works required to bring the property up to the “E” level would devalue the property by more than 5% of the market value

How do I get an EPC?

Only a recognised energy assessor can issue an EPC. The Government website lists accredited assessors.

How much does an EPC cost?

The location of a home decides cost, but generally, the price of an EPC ranges from £35 to £120.

When do Landlords need an EPC?

Landlords need a valid EPC to show tenants when they view a home for rent and when a property is put up for sale. 

BEIS publishes guidance for landlords relating to EPCs and complying with minimum energy efficiency standards.