The Intermediary – March 2025 - Flipbook - Page 54
BUY-TO-LET
Opinion
Going green is stopstart for lenders
W
hen we
conducted
the Mortgage
Efficiency
Survey, the
green agenda
was very much a lower priority. While
back-book work and concerns about
Scope 3 emissions were very much
in play, the consumer facing agenda
stalled. Many were awaiting more
direction from policymakers.
This year is supposed to be when the
long-awaited Future Homes Standard
rules are finalised and implemented,
but it’s not certain. The consultation
between the previous Government
and industry to hammer out the
details of this regulation concluded in
March last year, but the Government’s
response has been postponed since.
According to the Future Homes
Hub, both the final details and
timeline are on hold while Ministers
“consider how to ensure the standard
is compatible with its wider objectives
on housing.”
While not 100% confirmed yet, the
Future Homes Hub said in January it
is reasonably confident that it will see
homes future-proofed with low carbon
heating and high energy efficiency.
No further energy efficiency retrofit
work will be necessary to enable them
to become zero-carbon over time as
the grid continues to decarbonise. It’s
also confident that the standard will
include “an element of rooop solar to
deliver cleaner energy to households
and protect billpayers.”
The Future Homes Standard will
apply to new homes only, leaving
existing homes as the elephant in
the room. The transition to net zero
is a huge undertaking for the UK’s
housing stock, much of which is old
and not constructed with energy
efficiency in mind.
Added to this is the question of who
foots the bill. In the private rented
sector (PRS), landlords are mandated
to upgrade properties let from 2028
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The Intermediary | March 2025
to an Band C or higher. Housing
associations and local authorities have
also been given targets in the social
sector. It is much harder to predict
how the green agenda will play out in
the owner-occupier market, where
around half of homes are mortgaged.
Down to the details
We must think about it, though,
because legislation is coming.
Aer a groundswell of support for
environmental action to combat
climate change in the early 2020s,
carbon reduction has become
background music. It is still integral
in lenders’ long lists of plans and
obligations, but it’s now in the niygriy of what actually needs to happen
to achieve meaningful change.
Green mortgages haven’t taken
off at scale yet, but the market is
quietly growing. Halifax recently
announced that Energy Performance
Certificates (EPCs) will be factored
into affordability assessments. There
are now 60 green mortgages available,
according to the Green Finance
Institute, from discounted rates to
cashback incentives and higher loanto-income (LTI) ratios.
At some point, the use of EPCs is
going to become the norm. Lenders are
already carrying out analysis of backbooks to ascertain their own exposure
to climate risk and affordability.
For buy-to-let (BTL) lenders, there
is already a material financial and
regulatory need to have accurate and
up to date EPC information for all
loans on their books. Last year, the
Bank of England set out changes to
manage financial risks in residential
mortgage collateral in the Sterling
Monetary Framework (SMF).
The Bank said: “Since 2018, rental
properties in England and Wales are
required to have a current EPC rating
of at least E – or a valid exemption – to
be let out. To mitigate risks associated
with non-compliant properties, the
Bank is updating its eligibility criteria
STEVE CARRUTHERS
is business development
director at MSO Mortgages
for buy-to-let mortgages. Specifically,
non-compliant mortgages will no
longer be eligible as collateral in the
Bank’s SMF operations.”
BTL mortgages originated aer
1st August 2024 for which SMF
counterparties do not provide EPC
ratings will also be ineligible. Lenders
aren’t obligated to remove noncompliant loans originated before
this date from their back-books, but
those won’t be included for collateral
purposes. Ultimately, though these
loans have a book value on the lender’s
balance sheet, they become worthless
as collateral to raise further funds.
Given the impending 2028 deadline,
the incentive to lend against only the
most energy efficient properties is
clear. At the moment, these changes
to eligibility criteria do not apply to
owner-occupied mortgages. Which
begs the question – when will they be?
Lenders are already thinking very
seriously about this, as are valuers.
Estate agents report that buyers are
instructing more comprehensive
surveys to assess energy efficiency
and demanding that retrofit costs are
knocked off the asking price.
The Government is consulting on
reforms to regulation, EPC metrics
and data management protocols.
Under the previous Government, the
now abandoned Minimum Energy
Performance of Buildings (No. 2) Bill
proposed that mortgage lenders ensure
the average rating of their domestic
portfolios is at least Band C by the end
of 2030. Could some version of this
remain on the cards under Labour?
Not all of this is set in stone, and
details and dates remain hazy at the
moment, but one thing is for sure: this
is the direction of travel, and we all
need to think carefully about our own
roles in this transition. ●
