What do the Proposed EPC Changes Mean for Landlords?

The government proposed changes to the Minimum Energy Efficiency Standards (MEES) for England and Wales in late 2021 stating that as of 2025, all rental properties will need an EPC rating of ‘C’ or above. As of right now this is currently still in consultation and has not been written into law. However with the UK’s firm stance on climate change and reaching Net Zero it is likely these proposals will come into effect and as a landlord you will want to make sure you plan ahead to avoid the risk of loss of earnings. We are seeing a shift in lender thinking with some lenders offering better rates for more energy efficient homes and an EPC rating of C or higher is usually a main part of the criteria.

From 2025, under the current proposals all newly rented properties will be required to have an EPC rating of C or above. Currently, properties only require an EPC rating of ‘E’ or above. Existing tenancies will have until 2028 to comply with the new rule changes. For landlords, unless you want to risk a fine for non-compliance or not be able to rent at all, you will be compelled to improve your rating.

What is an EPC rating?

The Energy Performance Certificate (EPC) is a rating scheme to summarise the energy efficiency of buildings. It shows the energy efficiency of the property, as well as useful information on how you can make it more efficient. It serves as a legal requirement for landlords and is essential for potential buyers or tenants. If a property has a low rating, then the buyer or tenant will know that the energy bills for that property could be high.

The property is given a rating of between A and G. The more energy-efficient a property, the closer to A in the alphabet the rating will be. Any property in England, Scotland or Wales that is either being built, marketed for sale or let as an entire property requires an Energy Performance Certificate (EPC).

How EPC rating is calculated

An accredited energy assessor will conduct a visual inspection of your property. They will take a measured survey, photographs, and calculate the EPC rating by looking at any potential for heat or energy loss, checking for insulation throughout the property, looking at how efficient the heating system and water is and ventilation, inspecting whether you have double-glazing, energy efficient light bulbs, and so on.

Each segment of their inspection will be given a score depending on how efficient it is and what condition it’s in. The assessor will then calculate how energy efficient the property is and will provide an EPC rating for your property.

Your property is then graded according to a points system which runs as follows:

EPC rating A = 92-100 SAP points
EPC rating B = 81-91 SAP points
EPC rating C = 69-80 SAP points
EPC rating D = 55-68 SAP points
EPC rating E = 39-54 SAP points
EPC rating F = 21-38 SAP points
EPC rating G = 1-20 SAP points

An EPC report is issued alongside the rating which provides energy-saving suggestions on ways to improve your property’s rating.

Are there any exemptions to the proposed changes?

Yes, some properties are exempt under the proposals. These include listed buildings or buildings with restricted covenants if the improvements would unacceptably alter their appearance. A full list can be confirmed once the proposal is written into law.

What could the implications be for Landlords and BTL Mortgages?

  •  Worst case scenario if you were to not comply then legally you would not be allowed to rent the property.
  •  Depending on the work required it could be that a property will have to be empty until works are concluded.
  •  The penalty for currently not having a valid EPC is currently up to £5000 but there are currently calls to increase this further.
  •  By 2025 BTL mortgage lenders will not lend on properties which have an EPC rating lower than C. (Some lenders seem to be bringing this into criteria already)
  •  As a result landlords could be stuck on high standard variable BTL rates
  •  It is likely in the build up to the 2025 date that BTL mortgage lenders will ask more questions on cases where the property has an EPC lower than C to find out landlords plans to bring the property up to the required standard. This could mean a longer underwriting process and potentially applications being declined by lenders depending on the answers given.
  •  Some BTL mortgage lenders could bring the rules in before the 2025 date to manage and mitigate their risk. This could mean a smaller market of mortgage lenders available to a landlord with higher rates.
  •  The government estimates the average cost to landlords of making improvements to reach an EPC C rating is around £4,700. However other opinions suggest this could be higher and with the current cost of living crisis and inflation rising it is likely the costs will be higher still.

Next Steps

While awareness is beginning to grow around these proposals, there is still much consideration that needs to be given to the actual impact that these changes will have on landlords and property owners. There is a real concern that a substantial amount of properties risk potentially being declared ‘unrentable’ and subsequently ‘unsellable’ or ‘unmortgageable’ due to landlords being uninformed about what the changes will mean for current and prospective tenancies.

Planning in advance is essential. If you currently let out a property which is below the required level the first thing to do would be to find out what improvements, you will need to make to bring it up to the standard required.

Although the proposed rules are not currently law it is likely this will pass through parliament considering the government’s pledge to carbon zero by 2050. Completing the necessary works now could be more beneficial when considering material cost in line with inflation and the rise in interest rates.  Capital raising on the property could be the most suitable solution for you and with interest rates rising, the longer you wait the more expensive the costs could become.

You may think the best option will be to sell the property. It is worth noting that properties with a higher EPC are becoming more desirable and by making the necessary amendments you may see an uplift in your property value.  A third of buyers think EPC ratings are more important now than they were a year ago. A recent study found properties with an EPC rating of between A and C are increasingly popular with those buying properties to rent out. It found that so far in 2022 half of all properties bought by landlords were rated EPC band A to C, up from 39 per cent in 2021 and 33 per cent in 2020.