Those getting buy-to-let mortgages should be aware of future efficiency legislation
For property investors, buy-to-let mortgages are a popular option, as they provide an affordable way to purchase a property that can then be let out.
However, one expert is encouraging potential buyers to consider future legislation before making any final decisions, as it could lead to additional, unexpected expenses down the line.
Minimum energy efficiency standards
Those buying or renting a property will normally be provided with an Energy Performance Certificate (EPC). This is a document that provides information about a property's energy use and typical energy costs. It also includes recommendations about efficiency measures - like thermal wall insulation or a new boiler - that can reduce energy use and save money.
In addition, an EPC scores a property's efficiency with a rating from A (most efficient) to G (least efficient).
EPCs have been around for several years now and most people who have bought, sold or rented a home recently have seen one. In the past, these documents have been provided mainly to ensure buyers are fully aware of a property's energy use.
However, from 2018, all rented properties - both residential and commercial - must have an EPC rating of E or higher. The regulations will come into force for new lets and tenancy renewals from April 2018, and will be expanded to all existing tenancies in April 2020. According to the new regulations, it will be unlawful to rent a property that does not have an adequate EPC rating unless there is an applicable exemption. Landlords in breach of the regulation will be subject to a civil penalty of up to £4,000.
Separate regulations are also effective from April 2016 - these allow tenants to apply for consent to carry out energy efficiency improvements in privately rented properties, and the landlord cannot unreasonably deny the request.
Landlords need to be ready
Chartered surveyor Peter Glover has warned that landlords need to be ready for the new regulations. He told Mortgage Finance Gazette that those looking to buy a new property with a buy-to-let mortgage need to pay close attention to the property's EPC rating, as a score of F or G will mean additional costs will be required to improve the building's efficiency rating.
Since many owners with buy-to-let mortgages rely on rental income to service the mortgage, the minimum efficiency standards could pose two financial risks:
- If the property cannot be let out, there will be no rental income to pay the mortgage.
- The landlord will have to find the funds to pay for the energy efficiency improvements.
What can be done to improve an EPC?
Mr Glover says that thermal insulation and draught proofing are both very effective in helping to boost energy performance, and both of these can easily be upgraded on houses without much difficulty. However, if the property is a flat, there may be complications arising from the leasehold system, meaning that a freeholder's consent is needed, as well as the agreement of neighbours.
Older properties are more likely to have lower EPC ratings, especially those built before the 1920s. These homes probably have solid wall construction, which means insulating them is more difficult. Their heating and hot water systems also tend to be older and less efficient - upgrading to modern boilers can make a big difference.
Mr Glover is also encouraging mortgage lenders to make sure that buy-to-let landlords are aware of the new regulations, as it may affect their properties - and their ability to keep up with mortgage payments.