Comment: how will the turmoil in the finance and energy markets affect buy-to-let landlords?

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The fallout from Kwasi Kwarteng’s mini-budget sent the money markets into blind panic and few short weeks ago, and the knock on effect was felt right than across the buy-to-let mortgage marketplace.

The episode was a short lived panic following the “mini” budget announcement. But now, around a month later, with a new Chancellor and a new Prime Minister, although the money markets are still reeling from the fall out, there are signs the mortgage market is beginning to stabilise.

A world economic problem

Of course, a hike in interest rates was already on the cards before Kwarteng made his appearance, mainly led by the American central bank’s policy of steadily raising interest rates to combat inflation, which is raging at around 10 per cent in most Western countries. The unfortunate consequence of this, the consensus of expert opinion suggests, is that economies will slow down and go into a recession.

The Bank of England Base Rate has been following suit with steady rate rises and more to come, but the mini budget, with it’s promise of big tax cuts and huge unfunded spending commitments, had the effect of sucking the confidence out of the UK money market. The result was a rapid rise in the SWAP rates upon which fixed-rate mortgages and pension funds are pegged.

With the appointment of a new Prime Minister, both his and the Chancellor’s plans for the economy have brought some confidence back into the UK market, which in turn has meant the rise in SWAP rates seen after the mini-budget has been largely reversed. In consequence there’s a good chance we will see fixed-rate mortgages pricing drift lower again.

However, don’t raise your hopes too high, we’re unlikely to see the lows in mortgage rates that we’ve become accustomed to in recent years. As economies continue to battle inflation and a cost of living crisis we won’t see these low rates any time soon. But there are nevertheless some signs that rent-to-interest (RTI) calculations will soften again with a more settled fixed rate mortgage market environment.

Challenging times ahead for landlords

It’s abundantly clear that landlords and property investors are in for a tough ride over the coming months and perhaps years ahead. Not only will they endure volatile money markets – the cost of living explosion will put pressure on tenants’ incomes and therefore rent payments – but there’s an ever-changing political and fiscal backdrop – new legislation is coming along to challenge even the hardiest small-scale landlord.

Yes, the tail end of 2022 will be a challenging. Bbut then opportunities will arise for those enterprising landlords who are ready and prepared to take advantage. There’s a huge shortage of suitable reasonably priced accommodation for tenants in many parts of the country. The demand is there. This will underpin the investment risk for a buy-to-let investment, and should still give a competitive return compared to alternative investments types, when properly managed.

Rents continue to surge

It’s fair to say that most landlords – contrary to popular belief – don’t increase rents during the tenancy term or even over the lifetime of a tenancy in some cases, and some even fail to increase when re-letting, but safe to say average market rents have risen steadily, reflecting the shortage.

New-build numbers are still well below government targets and it will likely take years for build-to-rent developments to fill the void and even out the supply-demand imbalance.

Landlords leaving the sector

With income and regulatory pressures causing some landlords to leave the sector, and the flow of new rentals coming to market well below the long-term trend, there are real signs of a looming housing market crisis facing Government – something this new Government team should take urgent notice of.

The regulatory challenge

Putting aside the challenges posed by the Renters Reform Bill: the banning of section 21 and fixed term tenancies, one of the biggest financial challenges and causes of concern for the future of buy-to-let is the changes being introduced to the Energy Performance Certificate (EPC) requirements, governed by the Minimum Energy Efficiency Standard (MEES) regulations.

This is the set a minimum energy efficiency standards of EPC ratings currently set at “E” for domestic as well as commercial private rented properties in England and Wales. But the government has committed to upgrade as many private rented sector (PRS) homes as possible to Energy Performance Certificate (EPC) Band “C” by 2030, where this is practical, cost-effective and affordable, and this could be introduced sooner rather than later.

Raising the energy performance standard to Energy Performance Certificate (EPC) rating “C” will not be easy in many of those cases of traditional build (solid wall) older properties, and consequently will be expensive.

A revised phased process for achieving these improvements for new tenancies from 2025 and all tenancies from 2028 is the latest indicator the Government has proposed, taking into consideration issues of financing, enforcement, measuring energy performance and exemptions.

The Government’s aims for improving the energy performance of privately rented homes include:

• Cutting bills for low income and vulnerable tenants
• Lower energy bills for tenants in general, providing warmer homes
• Boosting the quality, value and appeal of landlords’ assets
• Providing improved energy national security through lower energy demand on the grid and reduced fuel imports

In support of this the preferred policy scenario would follow these four key principles:

• Raise the energy performance standard from EPC from “E” to “B” and “C”
• Phase-in improvements for new tenancies from 2025, and for all tenancies from 2028
• Increase the maximum investment requirement for landlords from £3,500 to £10,000
• Introduce a tackle ‘fabric first’ approach to energy performance improvements.

These are some obvious practical ways that landlords can improve the energy efficiency of their properties:

– Upgrade loft insulation – perhaps the most effective energy saver, preventing heat loss through the ceiling and roof

– Add cavity wall insulation or where the walls are solid, insulate the walls – perhaps the second most effective way to preserve warmth in the home

– Add double glazing – to reduce heat loss and noise pollution

– Upgrade heating boilers – will improve heating efficiency, create a warm home, reduce condensation and damp and reduce bills

– Upgrade draught proofing – to minimise the loss of heat by preventing warm air escaping and cold air streams coming in the home

– Fit LED lighting – it’s more energy efficient and cuts electricity costs

– Add smart heating controls and meters – aids to energy conservation and monitoring

Energy efficiency and mortgage applications

Mortgage lenders are now much more aware of the importance of energy efficiency ratings to the marketability of rental properties. Mortgage companies are increasingly adding EPC ratings to their lending criteria.

This is because, if they need to re-possess a rental property they want to be in a position to achieve the best possible price when they put the property on the market, or more likely auction it off. Some lenders are now stipulating less favourable mortgage rates for rentals with EPC rating below “C”, and in other cases loans have been refused altogether.

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