How Second Charge can help landlords pay for Green home upgrades

Marie Grundy, Managing Director, Second Charge Mortgages

I want you to imagine for a second you’re a buy-to-let landlord with three small properties that you let out to young professionals.

Various tax changes in recent years mean those properties are not as profitable for you as they once were.

But that’s ok, because you only bought them to boost your pension in retirement, which is fast approaching, and you’ve made a decent profit due to house price appreciation.

Recently, though, you found out landlords will be forced to ensure their homes have an EPC of at least a C by as early as 2025 as part of the Government’s net-zero plans.

The problem is, all three of yours are currently a D. Even worse, the Government estimates that the cost of the upgrades will average £7,646 a property, meaning you’re facing a bill of nearly £23,000.

With retirement around the corner, you don’t have that sort of money lying around – so where do you turn next?

What I’ve just outlined above is a fictional scenario but there will be thousands of landlords in this very position.

And they face a tough choice: sell-up – probably below market price to cover the cost of the upgrades – use their savings or tap into the equity they have in their portfolio.

For many landlords, I’d imagine the first port of call will be to remortgage. But there is potentially a better option – a second charge mortgage. And I’ll explain why.

Retain the rate

One of the main reasons borrowers opt for a second charge mortgage is that they are already on a competitive first-charge rate that they don’t want to disturb.

Given we have just exited a period of record-low interest rates, there will be a lot of landlords in this position.

However, buy-to-let mortgage rates have increased significantly over the past year, so landlords will almost certainly pay more than they were if they were to remortgage.

By releasing cash through a second charge instead, landlords can protect their first-charge mortgage rate while avoiding the early repayment charges that many first charge fixed rates carry.

And what’s more, many second charge providers will lend up to £250,000 these days, which should be more than enough to cover the required upgrades for most landlords.

Qualify for a discounted green first-charge mortgage

A number of lenders, including West One, have launched green buy-to-let second charge mortgages to help improve the energy efficiency of the UK’s housing stock.

Many of these loans offer discounted rates to borrowers with properties that have an EPC rating of between A and C, therefore landlords with less efficient properties do not qualify.

While there are a few providers which offer green loans to borrowers who pledge to make their homes more efficient, they are only suitable for those who have the cash to make those improvements.

By releasing equity via a second charge, a landlord can release the money they need to make the home improvements and, as a bonus, should qualify for a discounted green first-charge deal further down the line.

At a time when many of us are feeling the pinch due to the rapidly rising cost of living, I’m sure any discount – no matter how small – would be welcomed.

Use green seconds to upgrade the rest of the portfolio

While there are many lenders offering green first charge mortgages, there are currently just a handful, including West One, offering green second charge loans.

However, the ones that do exist tend to mirror those of their first charge counterparts: by offering a discounted rate for borrowers with properties that have an EPC of A-C.

If you have a landlord client that has a few properties with an EPC of A-C, they can borrow against those using a green second charge – and benefitting from the discounted rates they offer – to upgrade the properties that don’t meet that criteria. That discount will effectively make the upgrades cheaper.

Often, lenders also pledge to donate to green causes for every loan that completes. At West One, for example, we have pledged to offset one tonne of carbon for every 10 second charge completions and to donate to sustainable overseas development projects.

Flexible and competitive

There are many misconceptions about second charges, one of the main ones being that they are expensive.

While second charges do carry slightly higher rates than first charge loans, they are still highly competitive, with buy-to-let seconds around the 6-7% mark in plentiful supply.

Another major advantage of taking out a second charge is that the underwriting process is typically far less arduous than a mainstream mortgage.

Some lenders, such as West One for example, don’t credit score borrowers. Instead, affordability is determined by taking into account the rent received and the original first charge.

It means, therefore, that application to offer times are usually measured in days, rather than weeks.

Seconds can also be incredibly flexible, with terms available from three to 25 years in most cases, while interest-only options are also available.

The untapped resource

The misconceptions surrounding second charges mean many landlords are not aware of the benefits they offer.

However, for borrowers who need to access cash quickly at a competitive rate and who prize flexibility, they can be a great choice.

If your clients are worried about how they will pay to upgrade their homes to meet the Government’s incoming legislation, then they are worthy of consideration at the very least.

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