What landlords and property investors need to know about the new EPC rules

What are the new energy efficiency rules?

From 2025, If passed there will be new minimum thresholds around energy efficiency that a property will need to meet before it can be let out.

At the moment, all rental properties need to achieve a rating of at least an E on the energy performance certificate (EPC).

However, that bar is being raised over the next few years, to a minimum EPC rating of a C. From 2025 the proposed new threshold will apply to all new tenancies, and it will then be expanded out to cover all existing tenancies from 2028.

While the clock is ticking, as we get closer to the implementation date, it’s clear that the new rules are not particularly well-known or understood by many landlords. Our recent study with mortgage brokers found that half of brokers have not been asked about the new EPC thresholds by any of their investor clients. Just 4% of brokers said they had been asked about the new rules by all of their investor clients.

What happens if I fail to meet the new energy efficiency rules?

It is not just the expected efficiency rating of rental properties that are increasing - so too are the fines for failing to clear the higher rating.

Under the existing rules, landlords who are found to be letting out a property with less than an E rating will be subject to a fine of £5,000.

However, the new regulations will see the fine for not having a valid EPC rocket to £30,000.

Why are the EPC standards changing?

The government wants the nation to reach Net Zero status by 2050, and in order to do that it will need to tackle emission levels in the various areas of our lives.

Improving the efficiency standards of our housing stock, therefore, makes sense. If our properties are more efficient, then they will retain more of the heat and light generated within the property. That means that residents - whether owners or tenants - will not have to use as much energy.

If the property is less efficient, and it’s the dead of winter, then some of the heat generated by radiators and the like will leak out of the property, meaning that the heating will need to be on for longer - using more energy in the process - in order to maintain a sufficient level of warmth.

How is an EPC determined?

The EPC outlines the energy efficiency of a property and highlights what the costs of heating and lighting the property is likely to be. All tenants should be provided with a copy of the EPC certificate when they move in.

EPCs are put together by official energy assessors. They will look closely at the property to determine how efficient it is, likely to be, taking into account factors like the age of the boiler and your heating system, the age of the property, the standard of the walls, windows and roof, any insulation in place at the property and whether there are any renewable energy sources at the property, such as solar panels.

The assessor will take these factors together to determine a rating for the property. This can range from A, for the most efficient, to G for the least efficient properties.

The EPC is then valid for 10 years.

What changes can I make to improve my property’s energy efficiency?

This will vary based on the individual property. The EPC will not only explain the current efficiency level but will also detail some improvements which could be made which will boost the property’s EPC rating.

Measures could include changing the boiler, draught-proofing the windows and doors or adding insulation to the windows and doors.

How much is it going to cost to improve my property’s energy efficiency?

The costs of improving the EPC rating for a rental property for landlords can vary significantly, depending on the amount of work required.

Recent research by Knight Frank, based on analysing the EPC certificates of 30,000 properties, found that the average cost to upgrade a rating to at least a C would be £9,260.

While this was only around £5,500 for those properties already rated at a D, it grew to more than £10,000 for those rated at F and G.

How can landlords raise funds to carry out this improvement work?

Spending £10,000 on improving a property’s efficiency rating is a painful enough prospect, but when you consider many landlords have much larger portfolios, the costs of meeting these new regulations can swiftly escalate. As a result, it will be important for landlords to think carefully about precisely how they plan to pay for this necessary improvement work.

In some cases, landlords will be able to call on cash reserves or remortgage some or even all of their existing properties.

This latter option is becoming less appealing by the day, however, given the rocketing interest rates seen on regular buy-to-let mortgages of late. While remortgaging will be necessary for those reaching the end of a fixed term, doing so in the middle of a fixed period and incurring exit fees on top of a higher interest rate will be less than ideal.

A useful alternative for some might be a second charge term. Second charge homeowner business loan or a second charge bridging loan. These short-term property loans can be raised against a property to cover the costs of the improvement work in the short term and then cleared as part of the longer-term remortgage. Second charges have long been a useful tool for investors looking to carry out improvement work and can be arranged, for more modest sums - at Mercantile Trust for example, we lend from £25,000 up to £250,000 on our bridging loan deals, and £10,000 - £250,000 on our term offering.

The bridging loan sector looks set to be a busier one in future too, with our recent market study finding that two-thirds (66%) of mortgage brokers expect to help their clients arrange more bridging loans to cover efficiency improvements this year than last.