The Government recently launched its long-awaited consultation into Energy Performance Certificates (EPCs), and some of the proposals could have significant implications for the mortgage and housing markets.
Much of what was in the consultation was expected, such as a shift towards a more holistic view of a property’s energy performance within the EPC. However, some recommendations were more surprising, such as a proposal to shorten the validity period of an EPC - potentially to less than two years.
EPCs are currently valid for ten years and a new one is only needed if you are building, selling, or leasing a property.
The consultation puts forward five options for the EPC’s lifespan; as well as keeping it at ten years, it also suggests reducing it to seven, five, two, or ‘less than two years’.
While ten years might be a little too long, there might also be an argument to say that two years - especially anything less - might not leave enough time for any improvements to be carried out.
A new EPC with every remortgage
At the moment, it’s not a legal requirement to have an EPC if you’re remortgaging and for owner-occupiers at least, the consultation stops short of recommending they must have a valid EPC at all times.
However, we’re seeing growing signs the EPC is set to play a bigger role in the mortgage market. We recently heard Halifax announce its plans to link a borrower’s affordability to their property’s EPC rating.
It explained that properties with a higher EPC rating (A or B) generally have lower energy costs compared to those with lower ratings (F or G) on like-for-like usage.
Those borrowers who have homes with an A or B rating - around 15% of all properties - may now see a small increase in the maximum loan they can obtain, it has said. While those with an F/G rating - around 3% of properties - could see a small decrease, with no change for those rated C, D, or E, or where the EPC is unknown.
While some have argued the move is counterintuitive, as it lowers the borrowing of those who might need it the most to upgrade - it is still a sign of the direction the market is heading for the UK’s largest lender to take such a step.
While I’m not convinced this type of scheme will be rolled out across the entire market, I do think we’ll see lenders placing more focus on EPCs. With speculation the residential market will ultimately go the same way as the private rental sector and have mandatory EPC targets, there may come a time when lenders require a valid EPC.
In practice, if the validity period is reduced, it could potentially mean borrowers would need a new EPC every time they remortgage, especially if their affordability is linked to their EPC.
Bigger impact for the BTL market
For the rental market, the consultation goes one step further than for owner-occupiers. Currently in both the private and social rental sectors, when an EPC expires, a new EPC is only required when a property is re-let and not when the same tenant renews or extends their lease.
However, the consultation proposes rental properties must have a valid EPC for the duration of the tenancy. In practice, this means that if a tenancy lasts five years but the EPC is only valid for two, a landlord would need to obtain a new EPC during that tenancy.
Another proposal that will impact landlords is around Houses in Multiple Occupation (HMOs). Currently, a valid EPC is only required when the entire property is rented out, not when individual rooms are let. The consultation however proposes that a valid EPC will be needed for the entire property, even if only one room is rented.
A more joined up approach
Part of the Government’s reasoning around reducing the EPC’s lifespan is to keep energy efficiency at the forefront of property owner’s minds, potentially encouraging more of us to carry out upgrades.
If we move to a world where EPCs are valid only for a few years, a more structured approach to how EPCs are assessed will be needed, potentially seeing them being carried out alongside a valuation for a remortgage.
At SDL Surveying, we’ve been focusing on retrofitting services for some time and have a national team of accredited Domestic Energy Assessors (DEAs), qualified to undertake energy assessments, as well as RICS qualified surveyors. So we’ll be watching the results of the consultation closely.
The consultation closes at the end of February 2025, with any changes expected to be introduced in 2026. While it’s still early days, the EPC looks set to play an even bigger role in the mortgage market in 2025 and especially beyond.
