Louisa Sedgwick is Paragon Bank’s Managing Director of its Mortgages division. We spoke to her about the buy-to-let market and the challenges and opportunities that lie ahead.
The challenges and opportunities
Q: What's your take on the impact of the upcoming EPC minimum standards on Buy-to-Let lending at the moment?
I think an overhaul of the EPC world is probably long overdue, and the industry appears largely happy with that approach. EPCs may not be ideal, but it is the benchmark we have for now.
The issues for us arise around the delivery of improved EPCs. I think the consequences of any overhaul of standards are likely to be around the number of appropriately qualified assessors. How do we get them to the point where they are sufficiently well-trained within a relatively short period of time? The delivery is going to be quite a challenge.
Q: We have a deadline for the implementation of EPC standards in the rental market looming. Do you expect that to be pushed out?
If you look at the consultation about EPC standards, landlords are expected to improve their properties within, I think, fairly tight deadlines. If we don't know what an EPC looks like until some point in 2026, then that deadline is shortened even further.
The result is that the scale of such a quick improvement programme for new tenancies may be unachievable. I suspect that the 2028 deadline will be pushed out, but that the 2030 deadline will still exist because it is in the Labour Party manifesto.
The UK demographic of properties does not lend itself to a quick upscale in improved ratings. Not only do you have the logistical issue of getting these improvements done to an as yet undefined new standard, but if you remove a significant percentage of properties from the private rented sector as a result of these requirements, we will incur a massive shortage in properties. There are already 13 households for every new tenancy.
Aiming to achieve a net-zero target is fine, but we are currently not looking at the housing stock holistically.
Q: How do those regulatory and logistical issues impact what you're doing strategically for the landlords you're dealing with in terms of those that are trying to meet the EPC standards?
There is a massive appetite among the landlords with whom we work to improve the sustainability of these properties. Doing so will increase the capital value over time, and the rental yield.
The problem is they don't know what they've got to improve because the EPC reform is not going to be implemented until 2026. As a result, there is a lot of confusion within the marketplace.
We are starting to see landlords buying better-rated properties, so EPC A to C or maybe even a D, and then just doing some very basic updates or upgrades to that property to get them to what would be an A to C now.
But we need to get landlords not only undertaking retrofit work but also getting renewed EPC ratings post the improvement work. We conducted a recent survey, which showed 55% of all landlords who had upgraded their properties hadn't subsequently had an updated EPC.
The only incentive for them to do that at the moment is if they go to a lender that offers a favourable interest rate for an EPC A to C. But they only tend to do that at purchase. They don't tend to do that throughout the life cycle with that particular lender. So, I think there's limited incentive for them to get a new EPC.
For us, the question is what we can do to support landlords in undertaking the right work and getting an updated EPC? That’s where some of the work we have done with Cotality, which is absolutely brilliant, really helps. We can examine our back book and target help and incentives accordingly.
If we can encourage our landlords to take another EPC, then great. The cost of another EPC may be built ultimately into the proposition, but everyone benefits. It’s good for us, for landlords and their tenants. We’re working with landlords to see exactly what it is that they might well need to move this issue on.
That is some of the work that Cotality have done on our behalf. They can go out and say, "Actually, this is a D- property, and it might only need 2,000 pounds spending on it." And as such, you can then get it to an EPC B with very little expense. Or you might have an EPC F that needs 20 grand spending on it, and actually, that might help, as we might be able to lend them more money to enable them to do that.
As a result of the information that we've got from Cotality, we can see what our existing book looks like, segment it and then target landlords with appropriate contact strategies and support. We can see if they need to borrow more money or if any changes are more cosmetic. It gives us some real clarity that helps me to think about what the strategy needs to look like for existing customers.
The next question for us is, how can we then encourage other landlords to come to us based on the knowledge that we've got from our existing books? Energy standards, for all their complexity, are an opportunity for landlords.
Q: Does that opportunity express itself in new propositions?
We have to think about how we can incentivize landlords to improve their properties because we all benefit. There are no losers in this, provided the landlords don't over-gear themselves and to where they are in a situation where they just can't fund any improvement.
There is no issue with either the appetite of landlords to do this or lenders to support them. The main thing for Paragon is what the likely standards are, and who will deliver this work on the ground? We just don't have enough tradespeople because they're building the 1.3 million houses that need to be built alongside making our existing stock more sustainable.
Q: Is the Renters’ Rights Bill an issue?
There are a few elements of the Renters' Rights Bill that are absolutely right. No one would argue against elements like Awaab’s Law and the Decent Home Standard. We should all be adhering to those. But I think the changes to evictions for non-payment and arrears, the changes to rent in advance, which will impact poorer tenants in the PRS, and the abolition of no-fault evictions are impacting the economics of being a landlord at every level.
Landlords are reconsidering their positions. Not all are quitting the market, but some who wish to leave are selling portfolios to those who want to gear up, and energy performance is part of that discussion about value. This sort of trend will mean we will have to be more innovative about our propositions.
The private rental sector is so fundamental to the whole housing agenda that we cannot afford a wholesale shrinkage of the sector when it is ultimately in such demand. There is pressure everywhere. Only a few days ago, the government announced it was ceasing to use hotels to house immigrants. They will need somewhere to go, but I worry some of the unintended consequences of the legislation will make it more difficult for the poorest to secure rental accommodation.
Q: One of the issues raised in our whitepaper that was discussed at our Bletchley event was how many five-year mortgages might be being written at the moment on properties which will fail future standards. Do you think that is a significant problem?
I think it's huge because so much of what we write today on a five-year fixed rate for a new tenancy, potentially could fall foul of that legislation. It may prompt unwanted behaviours as lenders decide to lend only on A to C rated properties, which could cut lending down by 50% overnight. Or some may say I’m only going to offer two-year products because I know I can roll them on, but that, of course, can bring challenges around affordability, because of the different rules for affordability on five versus two years.
You’ve got all of these legislative and regulatory elements that are bubbling away, but without any real clarity from the government. We might get something early next year or in October that will acknowledge the responses. But, at the moment, if you look at the buy-to-let lending, 60% of it is on a five-year fixed rate. Not just ours, but across the board, because of the affordability constraints.
The future market outlook
Q: What does the market look like in four or five years’ time for Paragon?
I still think there's a tremendous amount of work to do. Tech and data play an increasingly invaluable part as an enabler for lots of data output, which is brilliant. It helps us to think about what strategies we need to implement. But the bottom line is, you still need boots on the ground to improve these properties.
Tech won't enable the improvement of the physical properties, but it absolutely is a brilliant enabler for us to think about what it is that we need to do to build the strategy going forward.
But our strategy has to work within the regulatory and legislative framework, and we will need the right people to do the work. The government is talking about upskilling individuals to enable them to do a lot of this work, but it's a four-year program. If you try and implement changes within that period, you're still not going to have the workforce to be able to support it. So I think there's a lot of tech that can absolutely help. And, as I say, we’re working closely with Cotality, who are delivering many insights for us to think about in our future strategies.
We will encourage the retrofit piece, but we also have to recognise that we can finance but not own the delivery of those improvements. We can align the delivery and are already working with Cotality’s concierge service and taking that out to landlords.
We also have a really good proposition around Refurb-to-Let. So we do a reasonable level of that lending, allowing for them to upgrade the property sufficiently for it then to have an improved EPC.
We need to encourage them to have another EPC post the work, and we are communicating the importance of having that EPC to them.
We are in so many ways ahead of the curve compared to other industries, but it remains an incredibly complex market in which we are operating. It’s why partnering with companies like Cotality is so important because making sense of the complexity requires expertise across the piece and systems and thinking that can interpret what we see in front of us.
