According to research from Cotality, some BTL lenders are “currently laying the groundwork” to limit their exposure to “net zero risk” when approving new loans.
The report added that other lenders are looking at bringing in more “dynamic data sources” for new BTL lending and refinance to help “modernise how they assess property-level environmental risks and energy performance”.
These include smart meter data, half-hourly electricity usage and pricing data, weather and flooding data, satellite and aerial imagery, open geospatial datasets and an Energy Performance Certificate (EPC) database.
However, the report warned that some lenders “have not yet fully worked out how net zero deadlines will affect their future lending appetites”.
Furthermore, a significant proportion of BTL lenders said their access to this type of data was still too “patchy” to allow them to make sufficiently well-informed decisions.
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Data is a ‘huge challenge’
The report said everyone in the study said the availability of “robust data” was a “huge challenge”.
They pointed to the Energy Performance of Building register, which houses all EPCs, Display Energy Certification and Air Conditioning Inspection reports, which many said was “patchy”.
The availability of flood risk and ground shrinkage data was also cited as “problematic”.
However, lenders said the range of options available to lenders wanting to improve their data was growing and the sophistication of models was improving.
Participants said the market could be “more flexible in its approach to data”.
Another “pressing challenge” was having systems capable of handling sufficient data. The report noted that there was variation by lender on whether they have EPC ratings on record for loans in their back books, or whether they are just collecting them for new loans and at refinance.
Cotality said lenders had said that loans that had reverted to variable rates had some “gaps in information”.
Loans in lender back books also predate EPCs being introduced and some participants said that even where the data is recorded, some system configurations mean it cannot be accessed and processed for analysis.
“Without this analysis, it is hard to identify trends in a book, sometimes resulting in remedial strategies being piecemeal rather than comprehensive,” the report said.
Legacy systems, participants said, “lack the capability needed to assess a loan book’s energy efficiency, let alone provide the functionality to use that information to improve it”.
Barriers to changing technology include a reticence to change the status quo and the assumption that cloud-based technology presented third-party risk. A low awareness of interplay between valuation and conveyancing data and climate and regulatory risk was also mentioned.
The delivery of improved energy efficiency was widely acknowledged as good for tenants and crucial for net zero, but issues around leasehold, older housing stock and unrealistic timelines potentially mean landlords would sell or tenants may have to be evicted, even if it was only temporary.
There was also a concern that legislative changes could “inadvertently create mortgage prisoners”, as failing to reach an EPC C band could render a property “unmortgageable” on a BTL basis, so there would be a sale to the owner-occupied sector, which could reduce private rented sector housing.
Brokers could play even bigger role
Brokers, participants said, have a key role as they are often involved with landlords and developers.
The report explained: “In the current market, there is no incentive or need for brokers to be involved in the EPC rating process. However, in the scenario that finance structure, retrofit costs and rates could be linked to a joined-up EPC assessment before and after remedial works, there could be a powerful incentive for brokers to oversee what commercial advantages may be on offer to landlords at the point of sale.
“As outlined above, there is huge potential in a product that encompasses carrying out an initial EPC assessment, recommending and costing specific retrofit requirements and doing a second EPC assessment post-completion. Were this to be bound up with referral commissions available to brokers, it is likely that that market would see a much more comprehensive and systematic approach to retrofitting privately rented stock already in the market.”
Mortgage market is ‘committed’ to deliver net zero responsibilities
The report said the market is “committed to delivering on its net zero responsibilities”, but clarity is urgently needed now.
“While policy detail and implementation dates are still under discussion, the majority of lenders are unwilling to ‘jump the gun’. This does not mean inaction, however. There is broad recognition that lenders need to be engaged in data collection, rationalisation and interrogation on a whole-of-balance-sheet basis now.
“The market is through the garden gate on this front, with some further down the path than others. Momentum is gathering. Lenders know they need data and secure and robust means to transfer, use and interpret that data. There are arguments for investing in better systems today.
“More data, more accessibility and better tools to harness it allows lenders to improve their service to customers, cutting time to offer, reducing post-valuation queries and delivering cost efficiencies. Fewer platforms mean lower integration risk, less chance of data breach and a stronger handle on where third-party performance can and should be improved.
“Not only is there a regulatory and legislative imperative to get more strongly to grips with this, there is the potential to carve out more nuanced investment opportunities at an institutional level,” the report said.
Mark Blackwell, chief operating officer at Cotality UK, said: “There is a clear desire in lenders to act to mitigate the impact of climate change, starting with the climate risk sitting on their own loan books.
“There’s an imminent regulatory deadline that requires them to do it, but during our research, we found that without more robust data inputs and better access to model scenarios, many aren’t as far on as they want to be.
“There are ways to address this, and our research highlighted that lenders are taking a wide range of approaches. What was common to all, though, is that meeting the challenge of net zero is not straightforward, and it will require the cooperation of all parts of the market to achieve it in such a short time.”
