How energy efficient is your HMO – Will your mortgage rate benefit?

How energy efficient is your HMO?

This is the question facing all landlords given the proposed new Energy Performance Certificate (EPC) regulations. As part of its drive to achieve greater energy efficiency across all rental properties, the Government plans to make it compulsory for all rental properties to have a minimum EPC rating of C – from 2025 for newly rented properties and 2028 for all rental properties.

While this move supports the Government’s Net Zero 2050 target, it presents a challenge for many landlords, particularly those with large, complex property portfolios or older, less energy-efficient buildings such as Houses in Multiple Occupation (HMOs).

Where are we now?

In 2018 a minimum EPC rating of E was introduced for privately rented properties. Now seeking to go further, the updated EPC proposals form part of a wider Bill currently making its way through Parliament.

According to the Government, there are around 3.2 million rented properties with an EPC rating of D or below. Furthermore, over a third of rented properties were built before 1940* and will be unlikely to meet minimum standards. This highlights the energy efficiency issue but also the scale of change that is needed to meet the new regulations.

What does it mean?

• Cost – landlords are expected to pay for the work required to bring their properties up to standard. Under the planned new regulations there will be an increased price cap of £10,000 per property (currently £3,500) for energy-efficient related renovations. Although regional and property size variations will influence the amount, the Government puts the average cost at £4,700 per property. It follows that landlords with several properties could be facing a significant bill to complete the necessary work. However, it is also worth noting that the penalty for failing to meet minimum standards is expected to rise to £30,000 (from £5,000) so it will definitely pay to plan ahead.

• Time – large-scale renovations can take several years, so forward planning is vital to ensure a smooth transition for your HMO portfolio. Understanding the implications of the change, finding approved tradesmen, managing the impact of property improvements on existing tenants and reviewing finance options will all take time to deal with.

• Funding – according to a recent report by Shawbrook Bank** 19% of landlords are currently funding refurbishments with credit cards or short-term finance products and 60% are utilising personal savings. To reduce the risk you may want to consider alternatives such as a bridging loan or an HMO remortgage. Finding the right mortgage for HMO property improvements is important particularly if your current deal ends in the next year or two. Think about whether you need to raise additional funds before locking into another fixed rate that could tie you in beyond the deadline.

• Opportunity – because EPC ratings are going to play an even greater role in how properties are evaluated by prospective tenants and letting agents, those that achieve A-C ratings will naturally be better positioned to command higher rents than those without these high EPC ratings. By acting now, in terms of getting your properties up to standard, you’ll be able to get ahead and stay ahead of the competition and earn back your investment quickly through the higher rents you can charge.

What can you do?

Start by knowing the current EPC ratings for your properties. In 2021, research by Shawbrook Bank revealed that over a quarter of landlords were unaware of the EPC rating of their properties. Armed with this information, the next step is to tackle what needs to change to bring your property up to standard. An accredited energy performance assessor will produce a report with recommendations and estimated costs for energy-saving improvements such as:

• Installing loft and/or cavity wall insulation
• Replacing central heating system/boilers
• Rewiring the property
• Upgrading windows to double-glazing
• Installing energy-efficient lighting

Identifying the most cost-effective energy-saving improvements to get the optimum return on your investment will be key. Once you know what is required you can put a plan in place to future-proof your property.

Financing HMO energy efficiency

At Vincent Burch Mortgage Services we offer expert HMO mortgage advice with a wealth of knowledge and experience. We can discuss the proposed EPC changes with you, the impact they’ll have on your business and help you identify the most appropriate way to cover your costs. And that includes looking at bridging finance to help you fund the improvements you’ll need to make before you’ll be eligible to apply for one of the new green mortgages that offer favourable rates to those properties with A-C ratings.