Green homes are getting higher on the adviser agenda as lenders begin to tighten their rules on what types of properties they will and will not lend on.
In an email to advisers on February 16, Skipton Building Society said it will no longer lend on rental properties with an Energy Performance Certificate rating of E or below.
“With effect from May 2, 2022, the bank will only be lending against UK rental properties with an EPC rating of A to D, and only where the D rated properties have the potential to improve their EPC rating to C,” it told intermediaries.
The government’s green homes target requires landlords to get their properties up to an EPC rating of C by the end of 2025 for all new tenancies, and by the end of 2028 for all existing tenancies. Though the target is caveated with “where practical, cost-effective and affordable”.
The EPC rating of properties will have to become a topic which is discussed in further detail with clients.Cavelle Johnson, mortgage administrator at Riach Financial AdviserSince setting this target, the government has said it is considering whether to introduce “mandatory disclosure requirements” for lenders to share the EPC ratings of the properties on their mortgage books.
Kwasi Kwarteng, secretary of state for the Department of Business, Energy and Industrial Strategy, said in October that “voluntary improvement targets” for lenders’ existing portfolios could be introduced too, which would require lenders to reach an average EPC band C across their entire existing mortgage portfolios by 2030.
Experts have warned buy-to-let investors could become mortgage prisoners if they do not make sure their property portfolios are eco-friendly.
Back in October, FTAdviser asked six mortgage brokers whether they included the energy performance of homes in their advice conversations. All six said they did not prioritise EPC ratings in discussions with clients.
One said it didn't concern them, as they didn’t think the industry would get into a situation where lenders are going to refuse lower EPC properties.
‘Should come as no surprise’
Now some advisers are keen to highlight EPC ratings as a “standard part of the conversation” - at least for buy-to-let clients.
Asked whether EPC ratings were an important part of his mortgage discussions with clients, Chris Costello, director of Liverpool-based CRC Mortgages, said: “Yes, 100 per cent. For buy-to-lets it is now standard as part of the conversation, [and] one I’ve been having for a good while now.”
For residential mortgages, Costello said the conversation is not as often. “Only usually if a ‘green mortgage’ deal is sourcing well, which is very often now.”
A number of lenders have launched green mortgage ranges which offer slightly better rates for residential properties with an EPC rating of A-C.
Imran Hussain, a director at Nottingham-based Harmony Financial Services, said “it should come as no surprise” to advisers that lenders are implementing changes to ensure the risk they take on also fits with ongoing regulation changes.
Whilst Cavelle Johnson, a mortgage administrator at Riach Financial Adviser, said EPCs have already been impacting the rental market “for some time”.
“The EPC rating of properties will have to become a topic which is discussed in further detail with clients going forward when they are looking at potential properties, both buy-to-let and residential,” Johnson explained.
If more lenders begin to specify a higher level of EPC grading, Johnson said it is possible that properties available to purchase on a buy-to-let basis will reduce.
She added: “If the criteria is also extended to mortgages for residential properties then it may reduce the availability of properties for non-cash buyers.”
Still some way to climb
Despite some advisers suggesting the green homes conversation is “standard” with a handful of their clients and that the industry shouldn’t be surprised by the steps lenders are taking, others are still worried EPC ratings are not high enough on advisers’ agendas.
“EPCs still seem some way off the agenda for mortgage brokers and potential borrowers alike,” said Carl Shave, director of Suffolk-based Just Mortgage Brokers.
“Landlords perhaps give this greater attention but even now some are still oblivious to the legal requirements when purchasing a property to let, especially those new to the buy-to-let market.”
With Skipton signalling its intent to restrict lending for buy-to-lets rated D or below, Shave said this could pave the way for other lenders to follow suit.
“However, until such time that the industry as a whole recognises the relevance of energy performance in relation to property and in turn lending, it will remain a topic rarely spoken about until forced to do so.”
Graham Taylor, managing director of Gloucestershire-based Hudson Rose, said he thinks lenders only lending on certain EPC ratings “is a good way” for them to make sure they are lending on a better quality of property.
But he added that whether or not lenders are driven by an underlying feeling that the EPC is going to affect future value “isn’t clear”.
Taylor continued: “With modern improvements in building materials, one would expect most properties should be able to come up to a C so it may not be too damaging from an end user perspective. Perhaps it is a way for them to remove ageing stock from their book.”
For those properties which may not be easily altered to take into account energy savings but are very desirable and sought after nonetheless, Taylor said he hopes the government will be understanding.
Beware of ‘Rent a Roof’ schemes
Josh Lillie, a mortgage adviser at Boon Brokers, said the importance of EPCs in the mortgage advice conversation is rising.
“As the cost of living is set to increase, and with energy bills costing clients so much, I think lenders will have to adjust affordability calculations if a property is not meeting at least a D EPC rating,” he said.
What buyers and homeowners do need to exercise caution with, said Lillie, is setting up solar panels on their roofs.
“This seems like a great idea in practice, however some solar panel providers offer a ‘Rent a Roof Scheme’ which is where the solar panel provider has a lease on a client's roof to help them pay for the panels.”
According to Lillie, lenders do not like this. “It is seen as another interest in the property and may affect their lending decision,” he explained.
“With those mandatory EPC ratings, it's not just that affordability will be affected, lenders won’t lend on a property unless it meets that EPC rating. Which will mean many homeowners are forced to renovate their properties.”
ruby.hinchliffe@ft.com
