The upcoming changes to the EPC regulations in 2025 and 2028 are gaining more attention in the industry. Many experts are now speaking on the importance of landlords meeting these deadlines and improving their properties; however, we’re yet to see much guidance on funding the work. What options do landlords have for covering the costs of these upgrades?
At the time of writing this, only one grant is available to assist with home improvements, but it is extremely limited in its acceptability criteria. Other than the Green Homes Grant Local Authority Delivery Scheme, the Government seem to have no further plans to release more accessible funding for landlords, leaving the financial strain solely on property investors. According to Shawbrook Bank, 60% of landlords plan to complete the works using their own savings or investments, but this won’t be an option for everyone. For those worried about funding the necessary works, here are some alternative finance options to fund green improvements for your buy to lets.
Capital Raise with a Remortgage
A remortgage is a good first option to consider if you have enough equity across your property portfolio. Releasing capital from your properties to fund the works is a straightforward and common property finance path for landlords looking to purchase a new property or complete refurbishments. However, it is important to be wary of how far into your current mortgage term you are. If you’re approaching the end of the term, we will have no issue securing a rate for up to six months ahead of the end of your early repayment charge (ERC) period. On the other hand, if you have just started a new mortgage deal, then you are at risk of facing high ERCs. One of the services that we can offer is a price comparison of a remortgage and then paying an ERC, or taking out a Further Advance.
Taking out a Further Advance means further borrowing with your current lender. This involves an additional loan, which will last the same amount of time as your existing mortgage; however, the interest rate you pay will depend on what products the lender is offering at the given time. It is worth noting that this new interest rate is likely to cost more, although your original rate and mortgage repayments remain the same, as you pay back each loan separately. Whilst not many people are aware of this option, and not all lenders offer it, it can be quite cost-effective. If you cannot remortgage or take a Further Advance, you may consider taking out a second charge.
Another option for funding your property improvements is a Second Charge. This option requires you to take out a second loan with a new lender, secured against your property, on a new interest rate. At the sale of the property, the Second Charge lender will only retrieve their money back after your original lender, making it more of a risk for them. The added risk will mean that interest rates on these products are typically more expensive. Choosing a Second Charge to fund your EPC home improvements should come after trying to secure a Further Advance.
Lastly, landlords may look to fund their energy improvements via a Bridging Loan. This final option can be the most expensive, as it is generally used as a short-term finance product benefitting those looking to bridge a gap between property sale timings or making refurbishments. To secure a Bridging Loan, lenders will want to see your ‘exit strategy’. For most landlords, a buy to let mortgage would be a clear option. Due to the costs associated with bridging, this should be a landlord’s last consideration.
Why landlords shouldn’t wait
There are many options out there for funding these home improvements which should encourage landlords to get started, however frustrating it may be to have to make them in the first place. With interest rates on a steady climb, and the Base Rate predicted to increase to 1.25% this year, securing a competitive rate now will help landlords save funds for what is expected to be an expensive endeavour.
There is also the risk that landlords may underestimate how long these amendments could take them to complete. According to Shawbrook Bank, while 38% of landlords expect to need their tenants to vacate their homes for up to four weeks, there are some who estimate them needing to leave for as long as four months. Such a range of time scales simply means that it is better for landlords to be safe rather than sorry.
By missing the deadline, landlords will put themselves in a serious situation. You may be ineligible for a mortgage, and therefore mortgage funding options will be unavailable. If this is the case, you will likely need to secure more expensive finance elsewhere.
Similarly, landlords will face a lack of income by missing the deadline, as their properties will become untenantable. Comparatively, the void period whilst making property improvements is likely to have significantly less impact than a lack of profit for a longer period of time should they miss the EPC deadline.
There is also the risk of fines of circa £30,000 for anyone failing to meet the new EPC standards. Alongside not being able to access funding, a new mortgage, or the profits from having tenants in a property, it is more than likely that landlords could find themselves paying much more than the £6-15,000 that they expect the home improvements to cost them.
Green Mortgage Prisoners
The final risk that threatens landlords is becoming a Green Mortgage Prisoner. Lenders currently are likely to reject a case if the property does not meet minimum EPC requirements, even if the client has an exemption. The market is still waiting for confirmation of how lenders will review cases going forward, and how landlords with exemptions can be protected.
We understand that this new legislative change is likely to be stressful, so we are here to help. We can help assess which option for property finance funding will be most affordable for you. Whether you’re ready to get started today or just found out about these changes, we’re here to help support any needs you may have. Please do get in touch if we can help any landlords struggling to navigate the changes. Submit an enquiry or call our experts on 0345 345 6788.
1st April 2022