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.
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.
Anything less than an EPC level of E and most buy-to-let lenders now won’t lend.Sebastian Murphy, JLM Mortgage ServicesMinimum 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.
As well as a voluntary EPC target for lenders, the government has proposed requiring new tenancies to reach a C-rating from April 2025 and all tenancies to reach the same rating by April 2028.
Clay warns that landlords with properties that do not meet the proposed standard may find it difficult to secure a buy-to-let mortgage.
“The government has also pledged that by 2035, [as many homes as possible] should have an EPC rating of C or above as part of its long-term plan to tackle climate change, meaning buyers or homeowners looking to remortgage may struggle in the future.”
Gammon at Knight Frank Finance says it is clear the government wants lenders to play their part in cutting emissions in the residential sector.
He adds that while the market for green finance has a “bright future”, it remains small.
Indeed, a broker poll by Countrywide Surveying Services found the majority of respondents (94 per cent) were yet to sell a green mortgage, which typically offers a lower interest rate.
“Incentives for borrowers are improving, but still don't move the needle for borrowers on a large scale,” says Gammon.
Little impact on value despite growing interest
Ana Bajri, head of sustainability at Countrywide Surveying Services, says although ‘brown’ features and poor energy efficiency are noted in valuation reports, the practice does not see much evidence that this is reflected in property sale prices, despite an uptick in demand for energy-efficient homes.
“At this point in time, valuers report that they are not observing any concrete evidence that energy-efficient homes are valued more, with other factors still being prominent in home purchases.”
But Bajri adds that CSS is starting to see a drive from lenders to start to consider energy efficiency and EPCs in mortgage valuations, with more lenders becoming increasingly concerned with low EPC ratings.
“Some lenders are keen to request more information relating to energy efficiency in the valuation reports, including noting the rating and highlighting any variations between the rating of the subject property and the comparables.
“[However,] we are not sensing low EPC ratings leading to lower valuations at this current time.”
Simon Jackson, managing director at SDL Surveying, says that to the extent that a poor energy efficiency rating is caused by a property in poor repair, it will have a lower value than a comparable property in good order.
“But today there is no hard and fast rule that says a D-rated property – which in all other respects is the same as a C-rated comparable property – is worth less,” he adds.
“Buyers do not today, in the main, differentiate price on the basis of energy efficiency alone.”
Marc von Grundherr, director of Benham and Reeves, a London estate agency, also says that while many homebuyers will value the longer-term saving an energy efficient home can bring, they are unlikely to pay a considerably higher sum because the property has improved on its EPC rating.
An owner-occupier property rated A or B carries a house price premium of 1.7 per cent when compared to a D-rated home, according to analysis in August from Nationwide.
“The real added value comes from what you do to the home to improve energy efficiency,” von Grundherr says.
Lee Martin, head of UK for new build sales platform Unlatch, agrees that if an improved energy efficiency rating has been achieved by the addition of a new boiler or double glazing, for example, this would add value in the eyes of a buyer.
“It saves them the time and inconvenience of doing it themselves,” he adds.
“Smart boilers, solar panels and other greener energy features are far more commonplace in today’s market and are only expected to become more prominent as we move forward.”
Meanwhile James Forrester, managing director of Birmingham estate agency Barrows and Forrester, says that homebuyers in some regions are prepared to pay as much as £20,000 more for a property with an above average band score.
But Forrester also says that for most buyers, the energy efficiency of a property will still come second to the location, size and overall feel of a home.
The future effect of energy efficiency on the market
Whether poor energy efficiency will affect a property’s value in the future is entirely dependent on what happens to properties, or borrowing on properties, which have poor energy ratings, says Jackson at SDL Surveying.
Although green mortgages can typically offer preferential rates, they are more niche than norm, while four in 10 homes have a band C energy rating, according to the government.
But Bajri says CSS is seeing more demand from consumers to better understand the energy efficiency of their homes.
“Innovative lending products, coupled with clarity on government incentives and enhanced market recognition, can make a real difference in improving energy efficiency in homes.
“This will in turn stimulate change and support comparable data, which would enable the market to start to price-in the added value of energy-efficient assets and create the value difference between low and high energy efficiency.”
Chloe Cheung is a features writer at FTAdviser
