EPC ratings and affordability

Whilst a good concept and potentially a great PR piece for lenders that would choose to adopt it, in reality, most people will not need this change in approach to affordability. More often than not, loan-to-income multipliers are the limiting factor to borrowing capacity over a granular affordability assessment - the exception being those with high commitments such as unsecured debts or finance agreements. It would be difficult to police, other than for those remortgaging who can supply 12 months of energy bills to demonstrate their savings compared to ONS figures used by most lenders. I think there should be more focus on lenders offering Green mortgages - with lower rates probably doing more for clients than a false economy baked into the affordability assessment.

It’s a good question and,
to a degree, those lenders that ask us to input the actual figure for the clients energy use are already accounting for this; as a B home would input £200pm, but a similar size E rated home may put in £350 - which the lender would then be able to double check against the bank statements submitted with the application. Those lenders that reply on ONS data however, would simply be using the one figure, which is most likely an average for any given region; meaning efficient homes are penalised in the affordability calculations and poorly insulated homes will get a benefit. It would be easy to fix if the ONS figures are broken down by EPC rating, but would require those lenders to get their affordability models changed and updated. What do we do with the houses that don’t have a current EPC rating though?

Assessing mortgage affordability based on EPC rating makes sense. The benefits for homeeowners of owning an energy efficient property would include cheaper mortgage rates, a higher property value and lower bills. However, without huge government support to upgrade existing housing stock, the main beneficiaries will just be the better off.

The issue of client-specific affordability is wider than just EPC ratings and energy costs. Most high street lenders use average expenditure (ONS data) to calculate and justify affordability. Whilst this leads to greater objectivity in mortgage approval, for some clients this goes against them, reducing their borrowing, whilst others, this goes in their favour. Whilst some smaller lenders increase mortgage borrowing by overriding ONS data with the clients’ lower expenditure, their income multiples are generally lower anyway. Until high street lenders introduce an ONS 'override' for frugal clients, an increasing number of more frugal borrowers will feel short-changed.

Lenders are currently incentivising energy-efficient properties through offers of lower rates, lower fees, or larger cashback amounts. However, if it can be demonstrated that energy-efficient properties lead to lower bills, this should be taken into consideration in the affordability checks that lenders conduct.
While the impact may be minimal, it is unlikely that lenders will adopt this practice in the near future and will continue to offer incentives such as lower rates, fees, or higher cashback for properties with EPC ratings of A to C.

There is a need for affordability checks that are not reliant on ONS data as people's spending habits on energy are going to be different, regardless of whether they have a good EPC rating or not.

Joe Bloggs in his 1960's pre-fab may wear 2 jumpers, 3 pairs of socks and walk around in a slanket all day and never put on his heating, whereas Jane Bloggs may have her 2022 EPC-rated A property with the thermostat at 32 degrees to replicate her desire to be on a beach in the Caribbean in December- People are different, therefore affordability calculations should be tailored to the individual not reliant on ONS data.

Lenders are quick to show the stick to brokers - stating that we need to drive their green agenda when there has been no sign of any carrots for borrowers.

No one should be penalised for having an energy efficient home - but they should be incentivised to improve their EPC rating. If lenders are so keen to see the overall rating of their books improve, then why is there little to no incentive for existing clients to improve them?

Could be as simple as writing to all existing borrowers in fixed rate periods and telling them that at rate switch time they will be offered a better product with lower fees if they improve the EPC rating of their home from E to C as an example.

Why are lenders pushing for brokers to solve the problem with new lending when they could address their existing mortgage books - seems very lazy!