Paragon Bank Managing Director of Mortgages, Richard Rowntree, discusses how Government energy efficiency proposals will impact the private rented sector.

The clock is ticking. Under Government proposals, all new property being let for new tenancies in the private rented sector (PRS) must have an energy performance rating of at least C by 1 April 2025. By 2028, that applies to all let property.

Landlords have had a lot to deal with in recent years – consistent changes to the tax and regulatory environment for example – so you can understand why climate change and the energy performance of property hasn’t always been their top priority.

However, this must change, particularly if these policies are implemented.

The Government has an overall target of making the UK’s housing stock carbon neutral by 2050, but clearly private rented homes are first in line of sight. Overall, greenhouse emissions from homes has reduced by 16% compared to 1990 levels, but homes are still responsible for 15% of UK greenhouse gas emissions, which increases to 22% if you include electricity consumption.

To help landlords meet these targets, the Government has proposed increasing the ‘landlord’s cap’. As it stands, landlords are allowed to offer homes with a lower rating than Band E if they spend £3,500 every five years to improve the property's energy efficiency. However, this minimum spend will increase to £10,000 after the Band C rules are implemented.

The energy efficiency of private rented sector stock has made great strides since 1996, when buy-to-let finance became more commonplace. According to the latest English Housing Survey, published just before Christmas, the PRS had a better SAP rating - the Government's method for calculating the energy performance of dwellings - than the owner-occupied sector.

Nearly four in 10 privately rented homes in England – 38.3% - have an Energy Performance Rating of C or above, compared to 35.5% in the owner-occupied space. Worryingly, however, that means that six out of 10 homes are below this level and require further investment.

Of course, it’s estimated around two thirds of the PRS is not financed with a buy-to-let mortgage so the PRS properties on buy-to-let lenders’ books are likely to be weighted in the higher echelons of EPC ratings. The energy efficiency of a property is certainly a core component of our underwriting and focus of our in-house team of surveyors.

However, despite the improvements made over the past 25 years, the profile of PRS stock means that it has a greater challenge than other tenures. Just under half of PRS dwellings are built pre-war, whilst a quarter are mid-terraced, which are more difficult to generate tangible improvements. Concerns have also been raised about previous technologies, such as solar panels, not delivering the expected returns.

However, that is a challenge and not a barrier to improvement. New technologies are expected to become more commonplace, such as battery storage for renewable energy, which could have a greater impact on a property’s energy rating.

Government finance schemes already exist to help landlords improve the energy performance of properties, but lenders will have an important role to play. It’s clear there needs to be joined-up

thinking between policymakers, landlords and the financial community to ensure finance is available to fund home improvements. Green finance initiatives will become more commonplace as the sector wakes up to the threat – and opportunity – climate change presents.

We have made our first move in this area with our green further advance range. Landlords will be able to apply for fee-free further advance to top up any support they receive under the Government’s Green Homes Grant, which is available until March next year. It’s a small step and there is more to come.

We are looking at how else we can help our customers improve their existing properties, whilst also encouraging landlords to target properties that are more energy efficient when adding to their portfolios.

We are yet to see the final outcome of the Government’s energy proposals for the PRS, but the direction of travel is clear. All housing stock must become more energy efficient and it will be the PRS that the Government is prioritising. Landlords and lenders must be prepared.