Plan Insurance Blog

Energy Efficiency Targets Creating Landlord Affordability Crisis

Landlords are encountering “a crisis of affordability” following the release of potential government plan’s for stringent new energy efficiency targets. A draft strategy references a ‘preferred policy scenario’ that includes new tenancies to have an EPC rating of C or above by 2025. This would then be broadened to include all tenancies by 2028.

The powers that be are still to publish the outcome of a consultation conducted back in 2020 on the subject of boosting energy efficiency in the rental market. Though relationship director at the Secure Trust Bank, Mike Feasey is concerned that landlords and property investors are facing a progressively more challenging situation. For context at present over 50% of the homes in England are rated D or below for energy efficiency.

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Energy costs, rising interest rates and rental reforms are proving a dangerous combo for landlords

He highlights, “feedback from private landlords” regarding “high costs” that are “proving a barrier when considering the benefits of upgrading their property’s energy efficiency credentials”. The expense is on a steep upwards trajectory due to the government’s proposal, “that all rented homes should fall into the A-C bracket for new tenancies by 2025 and for all tenancies by 2028.” The price of materials due to supply chain issues and the cost of labour due to shortages of trained tradesmen are severely impacting quotes to upgrade their properties.

These potential new energy efficiency targets have served to increase pressure on landlords who are already operating in difficult market conditions. It’s currently a far harsher regulatory and tax environment that in previous years. Yet taking no action now will likely be worse in the long term. Feasey fears that, “The cost of retrofitting existing buildings with green and sustainable measures will, in all likelihood, continue to rise and make it more difficult to recoup the cost of that investment throughout the remaining life of a property.”

The danger facing our landlords insurance clients and other property based businesses that fail to perform the improvements, is that they could be left with unlettable and/or difficult to sell properties. Feasey suggests private landlords and investors consider “residential investment loans” that can be used to “acquire or maintain existing stock” alternatively “the release of equity to fund further energy efficient residential projects” might be an option.

Will it help Landlords to make EPC improvements?

The UK’s housing stock contributes 20% of the country’s emissions. Improving energy efficiency is of significant importance. However the upgrades needed are expensive. There are precious few subsidies from government to aide the improvements. Yet, potentially in the long term there still is a business case to invest in the upgrades. One alternative would be to dispose of any property that is below the new standard.

Though a number of lenders are rewarding landlords with strong EPC ratings via lower interest rates. Many of these products do not mitigate fully the cost of carrying out the renovations. However the EPC changes should serve to increase the value to your property and potentially improve saleability.

Green Mortgage Case Study

The below is a genuine case study of a re-mortgaging exercise carried out in the market as of the middle of October 2022. The property in question is a studio flat based in west London worth in the region of £400k. The mortgage being sought is at 50% loan to value ratio. The flat generates rental yield of £1500 per month and has an EPC rating of ‘C’.

The mortgage broker describes how, “Fixed rates are horrendous right now compared even to last month. The best standard fixed rate available is coming in at 6% and although things have calmed somewhat since the mini-budget was announced (and most of its contents subsequently reversed) I don’t think they will be coming down any time soon.”

He suggests that to the landlord, “The most sensible and appealing option is an interest only ‘Green Mortgage’ with a discounted rate 3.99% achieved due to the property’s strong energy efficiency rating. There are no redemption penalties whatsoever, for two years.” So the sums work out at a £208,500 loan generating payments of £693.26 per month with a £3,127 fee to be added

So thanks to the strong EPC rating a monthly amount of £700.00 per month is achieved as opposed to around £1050 at the 6% interest rate. This product is a variable rate with a discount from the lenders standard variable rate (SVR).

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