Using Specialist Finance to fund EPC improvements
By West One Loans
Under proposed regulation changes announced by the government, all new tenancies will be required to have an EPC rating of ‘C’ or above from 2025 with existing tenancies being subject to the same regulations from 2028. Currently new and existing tenancies are required to have an EPC rating of ‘E’; however, this is being revised as part of the government’s strategy to decarbonize and reduce emissions.
It has been estimated that there are around 3.2 million privately rented properties in England and Wales that have an EPC rating of ‘D’ or lower. Bringing this amount of properties up to the required standards before the 2025 and 2028 deadlines presents a host of challenges for landlords, the most pressing being ‘how will landlords finance the cost of the improvements?’
A recent report from Habito estimated that the average cost of updating an EPC ‘D’ rated property to a ‘C’ rating is £6,155. This will fluctuate depending on the type of property with Habito’s analysis finding that it will cost roughly £3,653 to upgrade a one-bedroom flat, however for a larger detached property the cost of improvements is likely to be closer to £12,540.
While the improvements of rental properties and the subsequent benefits to the environment are to be applauded, there are concerns about the costs of the required works, particularly for landlords with large portfolios, and the impact on the buy-to-let market. One such worry is that some landlords will choose to sell off their properties rather than finance the upgrades – impacting the number of available quality rental stock. A recent survey found that as many as 52% of landlords that own a property with an EPC rating of ‘D’ or lower have considered selling their property.
There is a huge opportunity for brokers to help guide their buy-to-let clients through this and discuss the available financial options.
Second Charge Mortgages
One option for landlords to consider is second charge mortgages. One of the most common reasons for taking out a second charge is to raise funds to refurbish an existing property to increase either rental yields or the value of the property. Increasingly we are seeing landlords using these funds to make energy efficient upgrades to their properties, including loft and cavity wall insulation, new double or triple glazing and installing condensing boilers.
Using a buy-to-let second charge offers landlords flexibility with interest-only options and large loan sizes, with some lenders offering up to £500,000. At West One we assess affordability on rental incomes, taking the landlord’s tax banding. By not credit scoring landlords, those with less than perfect credit scores can be considered.
Second charges can often be one of the most cost-effective ways for landlords to quickly access the equity in their properties and should be an avenue that brokers are discussing with their clients.
Another option that brokers may wish to discuss with their clients are bridging loans. A bridging loan can be used to finance minor upgrades to a property that do not require planning permission, such as the installation of new windows or doors or the installation of a new central heating system.
Once the work has completed, the landlord can exit the bridge onto a new buy-to-let mortgage, with many lenders, including West One, offering green mortgages with preferential rates for properties with an EPC rating of ‘C’ or above. A bridging loan could be a good option when the required upgrades can be completed in under 12 months. If the work is likely to take longer, then a short-term funding option like bridging may not be suitable.
A new buy-to-let mortgage itself may be a good option for your client, if they are coming to the end of the mortgage term. A remortgage can be a useful way for the landlord to access the equity that has built up in their property and spread the costs out over a longer period. However, the suitability of this product will depend on several factors including the term of the mortgage and the affordability of the repayments.
While the suitability of each financial product will depend on the clients individual circumstance it is important that brokers are presenting them as viable options to their buy-to-let clients.
How can West One help?
West One are a leading provider of specialist mortgages and property finance, with a comprehensive range of specialist lending products including, bridging loans, buy-to-let mortgages and second charge mortgages. Our integrated portfolio of products enables us to deliver seamless access to specialist lending to homeowners, landlords and property professionals.
For more information on financing upgrades to meet EPC requirements get in touch with the West One team now.
For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.