Long ReadJun 27 2022

What advisers need to know about the drive to making homes more energy efficient

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What advisers need to know about the drive to making homes more energy efficient
Photo by Leon Neal/Getty Images

We are acutely aware of the need to improve the energy efficiency of our homes, which are measured using Energy Performance Certificates, and for lenders there are some important issues to consider. 

First, within the Department for Business, Energy & Industrial Strategy consultation, new regulation proposes that all lenders must have an average EPC C rating across their entire back book by 2030.

Second, there are proposals that all rental properties must be at least EPC C rated by 2028 and for new tenancies by 2025.

These dates have yet to be confirmed as they are part of the Minimum Energy Performance of Building (No. 2) bill, which is in the early stages of going through the parliamentary process.

For the wider residential market all homes should be C rated by 2030.

Back book analysis

Lenders need to address this, and at Landbay we are taking steps now to ensure our mortgage book complies, as far as possible, with these EPC requirements when they are introduced.

To ensure accuracy, we asked Kamma to undertake analysis of our back book.

Kamma specialises in geospatial technology and was able to report on all the EPC ratings within our mortgage book and how this compares with the wider private rented sector. 

We do have properties in our mortgage book that are rated D or below, but we are much lower than the PRS where 63.9 per cent of housing stock will not meet the C rating.

But we must be realistic here, because some of those properties may not be able to be improved to a C rating. So we, like all lenders, need to identify the risk to our back book.

Funding

For some of our funding partners who may securitise, investors will want to know the EPC risks within the residential mortgage-backed securities they are buying.

For our partners that are banks, the EPC risks will be equally important.

Transparency is key and if we understand the risk within our book, investors will know exactly what they are buying.

If we can demonstrate our loans are on properties with EPC A, B or C rating it will be more attractive to investors, who are increasingly wanting to know the green credentials of mortgage books.

By doing this analysis we know where we are today and our what our trajectory is to be net carbon zero.

Mortgage industry has a key role to play

We need to improve knowledge in the market around the whole EPC issue, and the mortgage industry can do more to help here. 

The government has said it sees lenders as “uniquely placed to influence homeowners, landlords and businesses to undertake energy efficient property upgrades at key trigger points in the mortgage lifecycle such as the point of purchase, renovation or remortgage”.

This applies equally to brokers who are often the first port of call for borrowers, including in the buy-to-let space.

Education and making landlords aware of these requirements is vital.

We conducted a survey earlier this year that found that 30 per cent of landlords did not know about the new EPC rules.

If they do not upgrade their properties, they will not be able to let them out unless they apply for, and are granted, an exemption.

Retrofitting

Kamma has estimated that around 2.9mn privately rented properties will need upgrading and the company estimates an average cost of £9,872 per home, making a total of £29bn. If most of this needs to be done by 2025, that is a tall order.

For anyone with properties in areas where house prices are low it may not be viable to spend thousands of pounds on an air or ground source heat pump.

For more expensive properties though it could be worth it. For those landlords with large portfolios, the retrofit work could run into substantial amounts of money.

For example, the Energy Saving Trust estimates that a typical air source heat pump installation will cost around £6,000 to £8,000.

A ground source heat pump is even more expensive at £10,000 to £18,000, with the cost of both options dependent on the amount of heat required. 

To help with these costs the government has launched the Boiler Upgrade Scheme. This provides a grant of £5,000 towards the cost of installing an air source heat pump or a biomass boiler and £6,000 for a ground source heat pump. 

The government has also removed VAT on home energy-saving materials such as heat pumps, insulation and solar panels for five years from April 2022.

But there is an important issue to consider regarding the installation of these energy-saving technologies.

There are simply not enough engineers and other workers to undertake all this retrofitting. Kamma says the retrofitting industry needs to be 10 times bigger than it is if the country is to meet net zero emissions targets.

Making a start

There are many considerations to bring housing stock up to the EPC C standard and there are no quick fixes, but we have to make a start.

That is why we are tackling this now before we have to, working out exactly what our risk is and to get ahead of the curve. 

When the government confirms the EPC dates, we will start an information exercise for our landlord borrowers.

We did that prior to the last change when the minimum standard of EPC E rating was introduced in 2018.

All of our landlords were able to upgrade but it was not such a big jump from an F or G rating to an E as it is from an E to a C.

It is good to see more lenders launching green mortgage products and our range has been available since June 2021.

It is an incentive for landlords to upgrade their properties by offering a discounted mortgage rate on buildings with A, B or C rating.

Take up has been increasing, and in March four in 10 of our mortgages were green. 

Landlords are now starting to engage in what they need to do, but there is still a long way to go.

Paul Clampin is chief lending officer at Landbay