The Daily Telegraph - Saturday - Money
Landlords: upgrade homes or face £5,000 fine
A deadline for buy-to-let investors to improve energy ratings is looming. Sam Meadows looks at how to get funding
The landlords of almost 300,000 properties will need to upgrade their energy efficiency by April or face several thousands of pounds in fines. The worst-rated properties in the country must be improved to a new minimum standard in three months’ time, before a new tenancy in the private-rented sector can be offered. In 2020, no existing tenancies can be extended unless they satisfy the new criteria.
Landlords that fail to meet the target risk being fined £5,000 per property. According to the latest English Housing Survey, released in 2017, 6.3pc of the 4.5 million properties in the private-rented sector were rated an “F” or “G” – the lowest possible – in 2015-16. This means there could be as many as 285,000 properties in need of work.
As a minimum, homes must be upgraded to an “E” rating. Additionally, the Government’s Clean Growth Strategy aims to upgrade every home to a “C” rating by 2030. Currently only 26pc of privately rented homes satisfy this requirement.
The changes have the potential to massively cut energy costs for tenants. The average annual bill for someone living in a “G” rated property is £2,860. Upgrading the home to an “E” rating cuts this to £1,710, while an A or a B-rated property costs just £750 a year. The current proposals, which are yet to be finalised by the Government just three months before their implementation, would cap the upfront cost of upgrades for buy-tolet investors at £2,500 per property. This will be payable only if no other funding is available.
Buy-to-let investors have three options for funding. The two main sources are the Green Deal and the energy company obligation, or “Eco”. Another option is loans and subsidies from the Government.
Originally a government-run scheme, the Green Deal was scrapped following very low take-up. It was taken over by the Green Deal Finance Company, a private enterprise, in January.
The company gives a loan for energy improvements, which is then paid off by tenants using the savings made on energy bills. Critics argue this is an unpopular option as tenants have to pay. The company refused to reveal how many loans it issued in 2017, citing commercial sensitivity.
Under Eco, energy suppliers are obligated to fund energy improvements, such as insulation.
Some local authorities will also provide grants to buy-to-let investors.
If none of these funding options is available, landlords will have to foot the bill themselves. However, if the total cost of work is more than £2,500, they can apply to the Government for an exemption. Until the cap is agreed, any landlord facing upfront costs will get an exemption.
The Department for Business, Energy and Industrial Strategy said the average cost of upgrades was more likely to be £865. A spokesman said: “Our proposals send a clear The Green Deal was introduced in 2012 to provide funding for landlords to upgrade their properties.
Loans were first issued from January 2013.
In the first six months, 38,259 Green Deal assessments were carried out, but only four signed up for a loan.
The scheme was scrapped by the Conservatives in 2015. In twoand-a-half years only 15,000 loans were taken up.
That, along with the stripping back of other funding, has put pressure on the energy efficiency industry.
The Green Deal Finance Company has since begun to issue loans again. signal to landlords that they need to improve inefficient properties, but they will only have to pay for these measures if they are unable to find third-party funding.”
Richard Jones of the Residential Landlords Association said he was disappointed that the Government had abandoned the principle of no upfront costs to landlords and said funding needed to be made available.
Ahead of the deadline, some landlords are buying up homes that are less energy efficient and working on them in order to boost their yield.
Adrian Miles, a builder, now owns 12 properties – a mix of commercial and residential – in the West Midlands.
In one example, Mr Miles purchased a home five years ago for £70,000. He spent £30,000 on upgrades, which included energy efficiency improvements such as insulation, and the house is now worth closer to £200,000. He said he charged his tenants £775 a month in rent – an 11pc yield.
“It’s just a case of doing quality upgrades for the right price,” he said. “It’s not so much how much you do, but where you put in insulation and getting the quality right.”
As a builder, Mr Miles uses his own company to carry out the work, keeping costs low. But for others there are funding options available.
Gary Hemming, of brokers ABC Finance, said landlords could get a refurbishment mortgage, which would cover 75pc of a property’s value and 100pc of the cost of works. Once the works are completed, they can refinance with a traditional buyto-let mortgage.
“With yields getting lower and profits squeezed these kinds of valueadds are vital,” said Mr Hemming. “A lot of this sort of work is appealing to tenants anyway, as it makes the house a nicer place to live.”
Homeowners aged 55 or more withdrew an estimated £3bn from their properties in 2017, the largest amount ever recorded. The figures, from specialist financial planners Key Retirement, show that borrowing by this group jumped by 40pc on the previous year – driven mainly by those who wanted to spend on refurbishments.
Anyone over the age of 55 can use a “lifetime mortgage”, also known as equity release, to draw on the value of their home. The majority used some of the money to fund home improvements, said Key Retirement.
The loans require no monthly repayments, with the interest rolled up until it is repaid, usually on the borrower’s death. Most lenders guarantee the total amount of debt will never exceed the value of the borrower’s home. Most rates are fixed for life.
However, some of the biggest lenders have introduced higher fixed-rate charges for borrowers in certain regions, namely London and the South East, where prices are higher and arguably more at risk of a correction.
On its “Flexible Max Plus” plan, equity release lender Legal & General charges customers in London and the South East 5.72pc, while borrowers elsewhere pay 5.66pc. On a 20-year, £71,500 loan the London borrower would pay an additional £2,584 in interest, according to research by adviser Laterliving Now!
Adrian Anderson of Anderson Harris, a mortgage broker, said: “This is all about lenders managing their risk, and this is just one factor they will use to set pricing. It’s frustrating for consumers and some will see it as unfair. Lenders have to be careful the difference doesn’t become too large.”
Legal & General said it aimed to boost equity release outside London and the South East, which traditionally account for the bulk of the market.
Insurance company Aviva, another major player, said that while a postcode had a minimal impact on its interest rates, it would be more significant in terms of the amount you could borrow. Borrowers in areas deemed to be more high risk in terms of value may find their borrowing capped.