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How Does a Bad EPC Rating Affect Your Mortgage Application?

Miniture house with a set of keys: how your EPC rating can affect your mortgage application

Energy Performance Certificates (EPCs) are a requirement for anyone wishing to sell or rent a property. EPCs provide a measure of a property's energy efficiency, rated on a scale from A (most efficient) to G (least efficient).


This rating not only influences a property's market value but also increasingly affects the ability to secure a mortgage.


This article explores the current impact of EPC ratings on mortgage accessibility, the legislative background, and what we anticipate will happen over the next few years.


Current Impact of EPC Ratings on Mortgage Lending


Lenders are increasingly factoring EPC ratings into their mortgage approval processes. This shift is driven by multiple factors, including regulatory pressures, market demand for sustainable properties, and the financial risks associated with low-efficiency properties.


Here’s what’s driving the change:


Risk Assessment:

Properties with lower EPC ratings (E, F, G) typically have higher running costs, making them less attractive to buyers and potentially more challenging to sell in the future. Lenders perceive these properties as higher risk, which can result in stricter lending criteria, higher interest rates, or even denial of the mortgage application.


Incentives for Green Mortgages:

Many lenders are introducing "green mortgages" that offer preferential terms for energy-efficient homes (EPC ratings of A or B). These can include lower interest rates, higher loan-to-value (LTV) ratios, and other financial incentives aimed at encouraging the purchase of environmentally friendly homes.


Regulatory Compliance:

In the UK, the Minimum Energy Efficiency Standards (MEES) regulations, introduced in 2018, prohibit the leasing of properties with an EPC rating below E. This has had a knock-on effect on the mortgage market, as lenders anticipate further tightening of regulations.


Legislative Background


The integration of EPC ratings into the mortgage process is underpinned by several legislative measures and policy initiatives aimed at improving energy efficiency and reducing carbon emissions.


The three of these are:


1. UK Minimum Energy Efficiency Standards (MEES): MEES regulations mandate that rental properties must have a minimum EPC rating of E. From April 2025, this requirement will extend to all existing tenancies, not just new leases. This legislation has heightened the importance of EPC ratings in property transactions, influencing lender policies accordingly.


2. EU Energy Performance of Buildings Directive (EPBD): Although the UK has left the EU, the principles of the EPBD, which aim to improve the energy performance of buildings, continue to influence UK policy. This directive requires member states to set minimum energy performance requirements and ensures that buildings are regularly upgraded to meet these standards.


3. Future Homes Standard (UK): The Future Homes Standard, set to be introduced in 2025, will require new homes to produce 75-80% less carbon emissions than those built under current regulations. This upcoming standard will likely raise the baseline for EPC ratings of new properties, making high-efficiency homes the norm and further embedding EPC ratings in the mortgage decision-making process.


Anticipated Trends in the Next Few Years


The role of EPC ratings in mortgage lending is expected to become even more significant in the near future due to evolving regulatory frameworks, market dynamics, and environmental considerations.


This includes:


Tightening Regulations

As climate policies become more stringent, it is likely that the minimum acceptable EPC rating for property transactions will be raised. This shift will encourage the retrofitting of older, less efficient properties and will likely result in stricter lending criteria for homes with poor EPC ratings. The UK government has proposed increasing the minimum EPC rating to C for all rental properties by 2028, which would have substantial implications for the mortgage market.


A person holding a leaf - Green mortgages are becoming more popular in today's market

Increased Popularity of Green Mortgages

The financial industry is expected to continue expanding its range of green mortgage products. As consumer awareness of environmental issues grows, demand for these products is likely to increase. This trend will incentivize homeowners and buyers to prioritize energy-efficient properties, further integrating EPC ratings into the mortgage process.


Impact on Property Values

Properties with high EPC ratings are expected to see an increase in market value as buyers and lenders alike prioritize energy efficiency.


In a 2022 Knight Frank article, they calculated that energy savings alone would be approximately £1,000 for those jumping two bands from E to C with an average price uplift of 8.8% (£29,289) for the property if such improvements were made.

Conversely, properties with low EPC ratings may depreciate, creating a stronger financial imperative for energy efficiency upgrades.


Technological Advancements

Innovations in building technology and energy efficiency solutions will likely improve the feasibility and affordability of retrofitting properties to achieve higher EPC ratings. As these technologies become more widespread, the overall energy efficiency of the housing stock will improve, influencing mortgage lending practices accordingly.


In Summary


The importance of EPC ratings in the mortgage market is set to grow as regulatory pressures, market demands, and environmental concerns converge. Currently, EPC ratings significantly influence lenders' risk assessments and the terms offered to borrowers. Legislative measures, such as the MEES regulations and the Future Homes Standard, are driving this trend, and further tightening of energy efficiency standards is anticipated.


In the coming years, the mortgage market is expected to see a greater emphasis on green mortgages and increased scrutiny of properties with poor energy performance. As technological advancements make energy efficiency upgrades more accessible, the overall landscape of mortgage lending will continue to evolve, with EPC ratings playing a central role in determining property values and loan conditions.


For prospective homeowners and investors, understanding the implications of EPC ratings is crucial for making informed decisions in an increasingly sustainability-focused property market.


 

NRG Assessments are experts in Energy Performance Certificates and assist property owners of both residential and commercial properties with their EPC needs.  Give us a call or get in touch today to discuss your requirements.

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