BSLS2023: Landlords should not drive property energy efficiency before legislation ready

Speaking at The British Specialist Lending Senate, large-scale landlord and director of sales and distribution for the mortgage division of Tandem Bank, Roger Morris (pictured), said the government consultation entitled ‘Improving the Energy Performance of privately rented homes in England and Wales’ which closed in January 2021, confirmed landlords should not spend any money on energy efficiency until April 2023 until legislation had concluded. The report said that legislation was expected to come into force in 2025.

Addressing the Senate at Brooklands in Weybridge, he said the legislation, which would mandate that new tenancies should have an EPC rating of C by 2025 and existing tenancies by 2027, is still currently waiting for its second reading in the House of Commons.

He added it was suggested in the first edition of the Building Back Britain report that any property worth less than £162,000 is not worth investing in to move it to an EPC rating of C. The report has since been updated and this mention has been removed. But Morris added that retrofit for lower value properties could have a “consequential negative impact on its value”.

However, Morris said that there was a lot of “disinformation” that landlords should act now prior to legislation coming in, and this could be counterproductive.

He explained that the government wanted to recalibrate Minimum Energy Efficiency Standards (MEES) so landlords making changes now could “fall foul of MEES”.

Morris noted that the MEES calculation of works needed to recalibrate property was “fundamentally flawed” in “costing, schedule of works and negative impact against the property”.

He also said certain improvements would not be tax deductible.

Social landlords might also be able to ‘get coverage’ as he was personally participating in a pilot where the government pays for improvements.

“What the government can do is actually allow energy improvement efficiencies to be tax deductible. That is the way to fund these changes not by borrowing more at a time where it becomes even more unaffordable. Tax breaks [would] say to landlords if you invest in your property, we will let you deduct it against your allowances that year. That’s the difference in what needs to happen,” he explained.

Interest rate rises create ‘problem of profitability for landlords’

Morris continued that interest rate rises had created a “problem of profitability” and brokers would need to think differently in the new buy-to-let market.

He explained that the current Interest Coverage Ratio (ICR) and rental yields would not permit a remortgage to go through, so to make it work the fixed rate needed to be reduced.

Morris added that in some instances the only way to make this commercially viable for a lender was to increase the fee to five or six per cent.

He said that this could create a problem as when the fixed rate comes to an end the capital amount has increased by around five per cent. The landlord and property are then in a “negative position” as they go onto the revert rate of the lender and may not have the ability to remortgage as the overall ICR position is worse off due to the increased capital amount.

“Have you explained factually what happens at the end of that deal? What is the revert rate and what is the option? Because that becomes entrapment, that’s not a good outcome for a landlord.” One option to make the ICR “fit” could be to reduce rather than increase the debt, he noted.

“When looking at a landlord, don’t just look at that specific deal. Look at their overall equity position,” Morris said.

He explained that another option could be to originate funds on remortgage on the residential property at a cheaper rate then use that capital to bring the average LTV to sub-60 per cent for the buy-to-let portfolio. This then opens up more buy-to-let options at a lower LTV tier.

Morris said that this could really work for landlords in the South East.