Navigating the Changing EPC Regulations for BTL Clients
There are fears that the private rented sector is sleepwalking into a disaster, with landlords unaware or under-prepared for the proposed EPC regulation changes which are due to come into effect from 2025.
Since 2018 new and existing tenancies have been required to have an EPC rating of ‘E’ or above; with a penalty of up to £5,000 in place for those properties that do not meet the requirements. This however is set to change.
The first proposed change, which is due in 2025, requires all new tenancies to have a valid EPC rating of ‘C’ or above.
From April 2028, this rule will be applied to all existing tenancies. The penalty for those properties that do not comply or have a valid exemption will rise, up to £30,000.
It is estimated that currently around 40% of rental properties have an EPC rating of ‘D’ or lower, to put that into perspective in 2008 just 9% of homes had an EPC rating of ‘C’ or above, it has taken 14 years for this to rise to 46% in 2022.
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So, what do landlords need to do? First things first, landlords need to be aware what EPC rating their property has by carrying out an Energy Assessment Survey.
The Domestic Energy Assessor will perform internal and external inspections to determine how energy efficient the property is and what possible level of efficiency is achievable if improvements are made.
Landlords are legally obliged to carry out the changes suggested in the EPC report.
However, before we go any further it’s important to note that there are some property exemptions for landlords to be aware of. Firstly, there are certain types of properties that are exempt, these are:
• Listed or protected properties,
• Temporary buildings (a building that will be used for two years or less),
• Places of worship,
• Detached buildings with a floor space of 50 metres or less,
• Buildings that are due to be demolished.
In addition, under the current EPC rules, if the work required to improve a properties EPC rating exceeds £3,500 then a landlord may qualify for a high-cost exemption.
Under the proposed changes to EPC rating from 2025, if improvements exceed £10,000 then a landlord may qualify for a high cost exemption
Landlords will need to apply for an exemption on the PRS Exemptions Register. An exemption is valid for 5 years, once the 5 years have passed the landlord must again try to improve the EPC rating, if this cannot be achieved then a further exemption may be registered.
Getting a property with an EPC rating of D or lower presents landlords with a number of challenges, the first and most common problem is likely to be financing the work, with the average cost of updating a property from EPC rating ‘D’ to ‘C’ being £6,155.
The cost of the required work is likely to hit those landlords with more than one property hard. Another challenge is certain types of properties such a Victorian semi-detached/terraced house will be near on impossible to upgrade and get an EPC rating of D or above.
A further challenge for landlords to contend with is the availability and quality of tradespeople to carry out the upgrades.
The combination of increased demands for property refurbishments and material shortages will have a knock-on effect for landlords being able to have the necessary work carried out within deadline.
Ultimately, the biggest challenge for landlords is the time frame, with all existing tenancies needing an EPC rating of ‘C’ or higher by 2028.
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All of these challenges are likely to put pressure on the already stretched private sector, a recent survey found that 35% of landlords would rather sell their sub ‘C’ rated properties rather than finance the upgrades.
Which brings me onto my next point, the impact the changing EPC regulations will have on the tenants.
The work required to improve the EPC rating could result in tenants needing to temporarily vacate the property, causing disruption to their everyday lives.
Landlords may decide to pass the costs of the work onto their tenants in the form of increased rents, adding a further squeeze on the finances of those living in the private rented sector and potentially planning to save up to buy a property of their own.
With some landlords choosing to sell off their properties rather than finance the upgrades, the quality and quantity of available stock looks set to dimmish.
However, it’s not all doom and gloom there are ways in which both lenders and brokers can and are assisting their buy-to-let clients with these changes.
Green Mortgages which offer preferential rates for properties with higher EPC ratings are just one way that lenders are preparing to support landlords and incentivise home improvements.
Here at West One, we launched ‘Funding the Future’ in September 2021.
The initiative aims to take responsibility for the changes we all can make to have a positive impact on sustainability and carbon reduction within the property and housing markets.
Our green buy-to-let product is available for properties with an EPC rating of A – C. For every product sold within this initiative, West One will offset one ton of carbon and support the government's targets for carbon neutrality.
As a lender we are also looking at ways we can support advisers with useful information to share with their clients.
Brokers are encouraged to use the expertise of lenders, like West One, to educate their clients and place a bigger emphasis on EPC ratings at the point of sale.
It is important to remember that with the many challenges these changes pose, there are opportunities and by working closely with your lenders we can continue to provide competitive solutions to the changing dynamics of your customer needs.