The Department for Business, Energy and Industrial Strategy (BEIS) published its consultation ‘Improving home energy performance through lenders’ which suggested the annual disclosure of average Energy Performance Certificate (EPC) ratings with year-on-year comparisons as well as gross value lending for improvement works.
This will include all Financial Conduct Authority (FCA) regulated lenders regardless of size and a target of having a portfolio average of EPC band C by 2030.
The government also proposed a league table to rank lenders and encourage the meeting of targets.
IMLA said a league table could cause lenders to spend too much time and effort trying to improve their rating and cause lenders to lend based on a property’s energy efficiency, rather than a borrower’s needs.
BEIS admitted avoiding poor performing properties would be an “unintended consequence” of setting targets but said it would try to mitigate this by setting incremental improvements so lenders could focus on making slow changes over time.
It also said one potential outcome could be that energy inefficient properties become cheaper, making them more attractive to those at their borrowing limit by giving them more room to raise additional finance to make improvements.
IMLA said it rejected the implication that lenders, rather than homeowners, were responsible for the energy efficiency of their properties and asked for a review of the EPC, to ensure it is accurate and fit for purpose.
The association said property owners should be made to obtain an EPC with all inspections carried out by qualified assessors.
IMLA also said it was unclear as to whether the FCA and Prudential Regulatory Authority (PRA) had been fully consulted about the proposals as some of the suggestions were already mentioned in the regulators’ Climate Risk Financial Forum.
As a result, the association called for a collaborative approach to avoid creating policies which could cause firms to breach requirements imposed on them by opposing authorities.
Kate Davies, executive director of IMLA, said: “These latest proposals from BEIS are highly unlikely to bring about real change. Rather, they would oblige lenders to devote way too much time compiling and disclosing data in an exercise which – at the end of the day – won’t change a single low-energy lightbulb.
“It makes more sense to ensure that property owners have really accurate information about the energy efficiency of their property – and the best place to start is by ensuring that EPCs are really fit for purpose.”
Davies said it made no sense to create “artificial competition” through a league table as it could cause lenders to avoid lending on properties that were less attractive and did not meet targets.
“In the worst case this could lead to some borrowers being unable to re-mortgage or sell. It is critical that this is avoided,” she added.
Davies said: “Rather than creating a distracting paperchase for lenders or imposing penalties if they fail to meet arbitrary targets, reducing our carbon emissions will require rather more fundamental cross-departmental thinking on where responsibility lies and how real change can be incentivised and encouraged.
“It will also need major investment to drive energy efficiency in the UK’s existing housing stock. These latest proposals from BEIS fall far short of the ambition needed.”
The report suggested lenders consider including energy efficiency in affordability calculations as well as a review of affordability rules to encourage the development of green mortgages.
It also said green mortgage extensions could be introduced to offer additional borrowing to existing customers for home improvements.
BEIS said such measures, along with consumer awareness, could influence mortgagors to make changes.
To balance the deliverance of energy performance improvements while making sure targets remain affordable to borrowers, BEIS proposed a £10,000 VAT-inclusive cap on additional borrowing for home improvements.
It said a £10,000 cap would result in the improvement of 40 per cent of owner-occupied mortgaged properties in England and Wales by 2030.
As the average length of a fixed-rate mortgage is five years and up to 1.4 million properties are refinanced each year in England and Wales, BEIS estimated that working towards goals could see up to 80 per cent of the mortgage market being within scope over the target period.
For instances where energy performance improvements were made before the introduction of lender targets, BEIS suggested taking any spend from April 2021 onwards into account and incentivising borrowers for taking early action.
The government said it wanted lenders to report on targets voluntarily at first and review how progress was made before considering the introduction of mandatory measures by 2023.
It also acknowledged some lenders have not begun considering energy performance and may not have the capability to immediately disclose such information.
Lenders will be expected to carry out their own internal audits but spot checks may take place to confirm firms were producing relevant data.
As smaller lenders may find it harder to produce the data, the government will expect auditing to be proportional to a firm’s market share which could be based on the value or number of properties in its portfolio.
It is likely there will be a penalty for under-performing lenders but this will be consulted on if and when it is implemented. The money raised from penalties will be used to fund energy performance improvements in the poorest performing properties or fuel poor households.
Small value or volume lenders could also be exempt from paying penalties as BEIS said targets may be harder for them to achieve due to the makeup of their portfolio.
Tenures and affordability
BEIS said tenure type and costs associated with extra borrowing could limit borrowers living in certain properties from improving the energy rating of their homes.
The consultation report said while mortgage arrears were currently at historical lows, mortgagors facing financial difficulties due to the pandemic would have increased as indicated by the rise in arrears in Q4 2020 as reported by UK Finance.
It said such borrowers could be exempt from the target as well as fuel poor homeowners.
For those unable to make changes to their homes due to tenure restrictions, mortgaged leaseholders should be exempt from overall targets and instead put on a database with a list of what can and cannot be changed according to leasehold terms.