The MEES require owners of privately rented property to achieve at least an E on the energy performance certificate (EPC) ahead of agreeing any new tenancy agreement.
This means that properties rated as F or G cannot be let to new tenants or have tenancies extended until the rating is bumped up, with non-compliance carrying penalties that range from £5,000 to £150,000 depending on the tenancy term.
Property Master, a digital BTL startup, said that the MEES could “derail” landlords planning to fix their mortgage rate ahead of further hikes in Bank Base Rate, and those landlords who are coming to the end of their two-year fixed rates secured back in April 2016 as an effort to avoid the 3% surcharge.
Property Master chief executive Angus Stewart commented: “This could be a particular problem for portfolio landlords as they will need to ensure all their rental properties comply with the MEES rules, even if they are not seeking to remortgage every property they have.
“Having just one property with a below standard MEES rating could prove to be a problem for some landlords looking for a new finance deal.
“Landlords who have a fixed-rate which is soon to expire or who just want to get a good deal ahead of any forecast bank base rate cannot risk ignoring the April MEES deadline.”
David Whittaker, chief executive officer of Mortgages for Business, said that landlords are mostly aware of the incoming requirements and are unlikely to be affected by their introduction.
“As far as we’re aware, lots of landlords already know about these rules,” said Whittaker.
He continued: “Particularly for portfolio landlords, they tend to have a good grasp of the laws and what would affect them further down the road.
“They grumble to begin with but ultimately crack on and comply.
“Besides, the lending criteria will mean that landlords will have to comply with the law in order to get the borrowing they need.”
Whittaker also said he expects lenders to starting checking the EPC status of a property, and not lend the properties where they either have no EPC or they don’t meet the minimum standard.
In turn, this may mean properties with F or G ratings will be downvalued.
However, Whittaker said it is unlikely landlords will rush to refinance ahead of the April deadline to avoid having to upgrade their properties.
“Whilst landlords could take this route [of refinancing ahead of April], it’s only kicking the can down the road,” said Whittaker.
“Landlords with tenants under an existing agreement have until April 2020 to bring non-compliant properties up to standard,” he continued, “we would expect the majority of landlords to be keen to comply as the rules are beneficial to them as well as tenants.”
An amateur’s worry
Rory Joseph, director at JLM Mortgage Services, agreed that the new standards are unlikely to be of major concern to portfolio landlords – who are better positioned to absorb costs and regulatory burdens.
However, Joseph said that amateur landlords without the experience and capital of their professional counterparts could be vulnerable to the MEES.
“Landlords who are in it for the long term in some respect see it as an inconvenience, because of the obvious cost to bring the properties up to spec,” said Joseph
He continued: “But a professional landlord with a number of properties should probably know that they need to periodically keep their properties up to date and maintain them, so I think those portfolio landlords will take it in their stride.”
“In the short term, it is a cash flow issue, but in the long term it will pay dividend,” he added.
Joseph also suggested the MEES could push more energy-inefficient housing stock into the market, while adding incentives for landlords to look into limited companies.
But the problem, stressed Joseph, is most pressing for the smaller landlord.
“With so much complexity and regulation, those who will suffer most are the accidental or amateur landlords,” said Joseph.
He continued: “They’re the ones who will be facing a big capital expenditure to bring properties up to scratch, and probably don’t have a nice cheque to pay for this kind of thing.
“The cost will be a real problem.”
Rob Barnard, director of sales at Pepper Money, said the changes are unlikely to have much impact as they will fall into the larger framework of regulatory shifts in the BTL sector – suggesting that landlords may not even be aware of the upcoming changes.
“Given the amount of regulatory change that landlords have needed to absorb in recent years, it is also likely that many are not aware of MEES, which will be introduced on the same day as tax relief on mortgage on interest for higher rate taxpayers is reduced to 50%,” said Barnard.
While some landlords may need to make improvements ahead of April and consider a remortgage as a finance option, Barnard said it is nonetheless “unlikely to provide significant stimulus to the market” as only a relatively small proportion of properties are rated either F or G.
“While these energy efficiency standards are an important consideration for property investors, we do not think they will change the current landscape of the BTL market,” he added.
According to the Low Carbon Energy Assessors (LCEA), as of June 2014, 5.20% of domestic properties were in the F category, while 1.51% were in G.