How energy efficiency is affecting the mortgage market

How energy efficiency is affecting the mortgage market
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An expected increase in the energy price cap, following rises in wholesale gas prices, is coinciding with the launch of the government’s boiler upgrade scheme in April.

With heat in buildings contributing to 21 per cent of UK carbon emissions, the government is encouraging homeowners to replace traditional gas boilers with more efficient, low-carbon systems such as heat pumps by way of a £5,000 grant.

Describing the decarbonisation of existing homes as a “huge task”, Simon Gammon, managing partner at Knight Frank Finance, predicts that mortgages are also likely to play an increasingly important role as we approach the goal of net zero by 2050.

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Within that timeframe is what the government refers to as its “confirmed ambition” for all new heating systems installed in homes to be low carbon from 2035, and a proposal for lenders to voluntarily agree to meet a portfolio average energy efficiency rating of C by 2030.

The proposal was mooted as part of a consultation on improving home energy performance through lenders, the outcome of which is to be published.

Where do lenders stand on energy efficiency?

Some lenders have already made such commitments. NatWest, for example, has expressed its ambition that half of its mortgage portfolio is at or above an energy performance certificate rating of C or equivalent by 2030.

Nationwide has also stated an ambition to “lead the greening of UK homes”, where at least half of homes in its portfolio will be EPC C or better by 2030.

However, EPC ratings do not currently affect the building society’s lending criteria for residential properties.

“While EPC ratings will be increasingly important going forward, it’s important that we don’t look at this in isolation, but that we also consider things like the costs, and viability, of retrofitting and the costs of living in the property, alongside a whole host of suitability criteria including carbon emissions when making our lending decisions,” says Rob Stevens, head of property risk at Nationwide.

As well as giving properties an energy efficiency rating from A (most efficient) to G (least efficient), EPCs contain information about a property’s energy use and typical energy costs, and recommendations about how to reduce energy use and save money.

Minimum energy efficiency standards in the private rental sector are already in line with some lenders’ EPC goals.

Since April 2020, landlords cannot let properties covered by the domestic minimum energy efficiency standard regulations if they have an EPC rating below E, unless exempt.

“Within the buy-to-let space, poor energy efficiency does affect the mortgageability,” says Sebastian Murphy, head of mortgage finance at network JLM Mortgage Services.

“Anything less than an EPC level of E and most buy-to-let lenders now won’t lend.”

Scott Clay, distribution development manager at Together, a specialist lender, predicts that energy efficiency will play a big part in mortgageability in the coming years for landlords and owner-occupiers.