Second charge the answer for landlords with EPC projects?

By James Rainbird

May 16, 2022

Important changes are on the way for the buy-to-let market. From 2025, if a landlord wants to rent out a property to a new tenant then the property must have at least a C rating on its Energy Performance Certificate (EPC), up from the current minimum standard of an E. From 2028 this is being expanded out to cover all existing tenancies too.

Thankfully a significant number of professional landlords are up to speed on these incoming rules. A recent study by Landbay found 80% of landlords with more than 10 properties are clear on the new rules, while 70% of those with between four and 10 properties understand the EPC requirements.

However, knowing about new rules you need to meet is only the start. Investors also need to think carefully about how they are going to go about reaching those higher required standards.

Paying for improvements

For investors who need to carry out works in order to raise the standard of their portfolio to meet these new requirements, there is the big question of funding. How are they going to raise the cash needed to pay for those improvements?

Remortgaging is one option, but not necessarily an ideal one. If the landlord is in the middle of an excellent, lengthy fixed rate deal then remortgaging will mean not only sacrificing that rate but also potentially having to shell out thousands on early repayment charges. Throw in the likelihood of moving into a higher and more costly loan-to-value band, and it’s clear that opting for the remortgage route can come with a heavy price.

However, there’s a useful alternative in the form of second charge mortgages, and it’s an option we have seen growing numbers of investors opt for lately.

The money is raised against the equity held in the property, so a second charge means the original buy-to-let mortgage is untouched. As a result, the landlord can continue to enjoy the benefits of the excellent, cheap deal they are already on, and can avoid the financial penalties that come from exit fees and moving up the LTV ladder.

What’s more, the last couple of years have provided landlords with a little more wiggle room on the equity front, thanks to the increased movement in house price growth. According to the latest house price index from the Office for National Statistics, the typical UK property saw its value jump by 10.8% in the 12 months to December 2021. In cash terms, that meant it grew in value by an average of £27,000. Unlocking a chunk of that through a second charge mortgage can be just what a landlord needs to cover the costs of the improvement work needed to get that EPC rating up.

Creative lending

It’s worth highlighting just how flexible lenders have become when handling this sort of lending too. The second charge market as a whole is benefitting from the entry of new lenders who are looking to shake things up, particularly by considering cases at higher LTVs than were previously available.

But lenders are also adopting a creative approach when providing second charge deals to landlords. Stress tests are handled in a more favourable way by lenders who are not bound by the Prudential Regulation Authority’s rules, while some will allow borrowers to raise funds across multiple properties at the same time in order to ensure the sums work.

It’s a useful reminder of the positive attitude towards lending that is present in the second charge market, and the flexibility that some lenders can employ to help get a case over the line.

Getting a foot in the door

However, this can require some expertise when it comes to packaging up the case and presenting it in a way that will help a lender deliver a positive response. This is known as a specialist market for a good reason – advisers who handle only a couple of second charge cases a year may not necessarily have the contacts or industry insight to know where to place these cases.

That’s why working with an expert in the field can make such a difference. Second charge specialists like Pink Pig handle seemingly complex second charge mortgages on a daily basis and can ensure that your client not only receives the highest possible standard of service, but also secures the funding they need, whether it’s for EPC-related improvements, to bolster their portfolio, or simply to rearrange the financing of their business.