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BUY-TO-LET: Are lenders charging more for low EPC bands?

Journalist: Sarah Davidson, Freelance

ended 21. January 2023

I've seen a couple of specialist lenders pricing BTL trackers higher for rentals with EPC band D or below and giving better terms on bands A to C. 

Obviously this is ahead of EPC standards changing in 2025 and lenders are cushioning against backbook risk. 

But from the market's point of view, won't charging landlords more on their mortgage at the same time as they need to upgrade those properties just exacerbate landlords selling up? And that's not going to improve housing stock's energy efficiency. It's just going to make renting even MORE expensive.

Is this a one off thing or are lots of lenders pricing this way on new BTL loans?

5 responses from the Newspage community

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Riz MalikVerified
Independent Financial Adviser at R3 Wealth
My heart goes out to buy-to-let landlords right now, who are being hammered from all sides. Many property investors are currently more concerned about the viability of their holdings than the upcoming EPC changes. Saving a few basis points on their debt has little net benefit. Instead, grants and incentives like the Coventry Building Society's Green Together Reward should be used. Alternatively, If we are truly concerned about energy efficiency, landlords with compliant portfolios should be eligible for a tax break. If the cost of financing rises as a result of their D or lower EPC ratings, many landlords will simply pass the cost on to tenants, many of whom are already struggling with their outgoings.
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Scott Taylor-Barr0
Principal Adviser at Barnsdale Financial Management
There has been a move in the mortgage market overall, not just buy-to-let, where properties with a high EPC rating of A or B, will get a slightly lower rate than other homes. Some lenders extend this band to cover C-rated properties too. This is a change we're seeing due to the signals from the central government on how it intends to use mortgages and lenders, to encourage homeowners to improve the energy efficiency of their property to help achieve the UK's net zero pledge.
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David Conway0
Director at Clayhall Financial Services Ltd
EPC linked mortgages are around 10% of deals currently available and aren't just restricted to landlord specialists. Major brands like Barclays, Lloyds Group, and Natwest offer them in their residential AND buy-to-let ranges, driven by a desire to improve their green credentials. The difference isn't a market driver affecting landlords though as it's a relatively small discount (as low as 5bps, less than £5 a month per £100k borrowed). The main driver will come in 2025 when landlords consider how to finance the improvements required to meet the legal requirement. As happened when the minimum E grade EPC requirement was applied, lenders simply stopped lending to those not compliant, but the C grade is a much higher bar and more costly to achieve. Landlords will have to consider whether their investment remains a viable proposition.
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Gary BoakesVerified
Director at Verve Financial
The EPC changes in 2025 are going to be massive for Landlords, we have already seen a landlord quoted £20,000 for home improvements to get it to a C rating. This property was subsequently sold and bought by a FTB couple, this is exactly what the government wants- either a more energy-efficient home or increased stock for buyers- win win.
This is major agenda for the government and it is only right that customers should be incentivised by the lenders to help with this, however, I don't think the discounts being offered at the moment are enough and lenders could be doing more to drive this forward.
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Lee Johnson0
Director at Willow Private Finance
It's not wide practice for specialist lenders to make the change in pricing for BTL trackers with EPC band D or below, but we have seen it. We understand the reasoning behind the strategy, but landlords will be forgiven for reviewing their portfolios and making commercial decisions over which stock to retain and invest upwards of £10,000 to improve their EPC rating and which to sell. Increasing rents were already being discussed for this year, but this may well compound the issue for tenants, who are already facing challenges. The extent to which government and lending policy affect Landlords' long-term strategy will be, in large part, influenced by the confidence in the growth of the property market and if the current increased competition and flexibility between lenders continue.