EPCs play an important role for mortgage lenders.
They’re a legal requirement, for starters.
Beyond that, energy performance data also offers crucial information for risk and affordability assessments. And it enables mortgage lenders to explore new sustainable revenue opportunities too.
In this guide we’ll cover everything you need to know about EPCs as a lender:
- What are EPCs?
- How are EPCs calculated?
- What do EPC ratings mean?
- What are the EPC requirements when selling a home?
- How do mortgage lenders use EPCs?
- What are the key issues with the EPC methodology?
- Is any alternative energy performance data available for lenders?
What are EPCs?
An Energy Performance Certificate (EPC) is a legally valid document which rates how energy efficient a property is on a scale from EPC A (most energy efficient) to EPC G (least energy efficient).
The EPC also provides a set of recommendations to improve the energy efficiency of the property, and a potential energy efficiency rating if those improvements were made.
EPCs were introduced by the UK government in 2007 as part of the (then Labour) government’s attempts to ensure that buyers and renters were informed of the likely cost of energy before committing to a home.
Having an active EPC became a legal requirement: without one you could not construct, sell, or let out a home.
Despite this limited initial objective, they have since become the basis for many regulations around housing and energy efficiency, and through this have become the most widely accepted source of energy performance data for the UK housing market – making them vital for mortgage lenders in their contribution towards housing decarbonisation.
Existing EPCs are freely accessible via the gov.uk EPC register.
How are EPC ratings calculated?
EPC ratings are calculated using a methodology called Standard Assessment Procedure (SAP), which was developed by the Building Research Establishment (BRE) for the UK government.
Here’s a brief overview of how EPC ratings are calculated using SAP.
The SAP methodology uses lots of inputs relating to a property’s energy use, such as:
- Property age
- Construction materials used for the walls, floor, and roof
- Insulation type, material, thickness
- Heating and hot water system
- Window types, materials, glazing
And many more.
An EPC assessor will visit a property to determine these inputs – investigating construction and taking measurements.
These inputs are then entered into the SAP calculation, alongside standardised assumptions about housing occupants and their energy-related behaviour.
Two ratings are given as an output from the SAP calculation:
- Energy Efficiency Rating (EER): a measure of the energy costs per square metre per year for the property.
- Environmental Impact Rating (EIR): a measure of the carbon emissions of energy use in the property per year.
The EER is the headline rating and is used interchangeably with EPC – when the phrase ‘EPC rating’ is used, it is typically referring to the EER.
The EER is first converted into SAP points, a scoring system of 1-100 wherein 1 is the highest possible energy cost and 100 the lowest.
Then the SAP points are converted into an EPC rating.
- EPC rating A = 92-100 SAP points
- EPC rating B = 81-91 SAP points
- EPC rating C = 69-80 SAP points
- EPC rating D = 55-68 SAP points
- EPC rating E = 39-54 SAP points
- EPC rating F = 21-38 SAP points
- EPC rating G = 1-20 SAP points
On the final EPC for a property both the SAP points and the EPC rating are given.
What do EPC ratings mean?
EPC ratings run from A to G, where an EPC A represents the highest possible energy efficiency and EPC G the lowest.
An EPC A or B is seen as very energy efficient, meaning lower running costs and lower carbon emissions (though this isn’t always the case, see the ‘key issues with EPCs’ section).
An EPC C home has good energy efficiency. This is the minimum standard that the UK government is targeting, aiming for as many houses as possible to meet an EPC standard by 2035.
EPCs rated D-G are not energy efficient and will need improvements to bring them to the minimum standard. It’s highly likely that the government will introduce policy in the future to bring homes rated EPC D-G to a higher standard of energy efficiency, as we saw beginning with the introduction of the Minimum Energy Efficiency Standards (MEES) for domestic landlords.
This is reflected in the traffic-light coloured labelling system used on the certificates, running from green (EPC A, B, C) to yellow (EPC D), to orange (EPC E, F), and finally to red (EPC G).
What are the EPC requirements when selling a home?
Since 2008 it has been a legal requirement to have a valid EPC for a UK home available when it is constructed, sold, or rented out.
EPCs are valid for 10 years once created.
In 2018 Minimum Energy Efficiency Standards (MEES) were introduced for domestic rented properties, making it mandatory for all rental properties (apart from valid exemptions) to be at least an EPC E rating for any new tenancy starting after April 2020.
There was a regulatory proposal to increase the minimum standard under MEES to an EPC C by 2028, which would have substantially increased the energy efficiency of homes on the rental market.
This was scrapped by the Conservative government in 2023.
However, MEES will undoubtedly make a return – the Climate Change Committee have been crystal clear that 89% of UK homes have to achieve an EER of A-C in order to achieve a net zero pathway for residential property. Whilst the timing can be debated, the target cannot. Labour have already confirmed that they would reinstate the plans if elected at the next general election.
How do mortgage lenders use EPCs?
Mortgage lenders use EPCs in three key ways:
- Legal requirements
- Risk assessment
- Green revenue opportunities
Legal requirements
Because an EPC is required to sell a home, an underwriter or mortgage broker will check the EPC register for a valid EPC as part of the mortgage application process. This is an important step to ensure they are legally able to lend on the property.
Today, most lenders are also required to submit climate-related financial disclosures as part of their reporting cycle, including their climate transition plan, targets, and progress towards those targets. EPC data is currently the main source for this to assess the energy efficiency and, therefore, carbon emissions of properties in the portfolio – a major part of financed emissions / scope 3 emissions for most lenders.
Risk assessment
For new mortgage loans (i.e. a lender’s front book) affordability assessments are crucial for lenders to determine the mortgage payments that a borrower can afford and reduce the risk of arrears or defaulting on the loan. With energy bills significantly higher on energy inefficient properties, EPC data is needed to accurately check affordability.
Energy efficient properties are also much more likely to retain (or even increase) their value over time, so they represent a lower risk loan for the lender.
For existing mortgage loans (i.e. a lender’s back book) it’s vital for lenders to always have an accurate view of the valuation of their portfolio and any risks associated with it. Today, that includes climate risk.
This includes physical risks on property associated with climate impacts i.e. flood risk, subsidence risk, erosion.
This also includes transition risk: the business risks associated with the transition to a low carbon economy – which, for mortgage lenders, includes legislative drivers to reduce the carbon emissions of their portfolio.
Financial institutions are already required to report on their financed emissions and plans to reduce them. For mortgage lenders, the vast majority of financed emissions come from the carbon emissions associated with the properties in their back book portfolio – and EPC data is the primary source for measuring this and reporting on improvements.
It’s also likely that future legislation will make it mandatory for mortgage lenders to disclose an energy efficiency rating for their portfolio and put an action plan in place to bring that rating to an EPC C at minimum – the government consulted on this as an idea in 2020, and it’s likely that future governments will introduce it alongside stricter MEES regulations for landlords. This presents further transition risk for lenders today and is another reason that they need access to EPC data.
Green revenue opportunities
ESG has become increasingly important to investors in recent years, and especially the environmental aspect of investments.
In terms of property, delivering clarity on the environmental impact of property-related loans is becoming common practice for issuers of residential mortgage-backed securitisations – both in terms of their financed emissions and their EPC rating.
Whilst we are yet to see the kind of ‘green premium’ for ESG-rated property assets (e.g. green RMBS) that have been delivered in other asset classes (e.g. green bonds), there have already been scenarios where issuers have struggled with liquidity due to a lack of ESG data on asset pools. EPC data, therefore, may even support fundraising objectives for UK mortgage lenders.
What are the key issues with the EPC methodology?
As we’ve seen, EPCs are seen as the primary data source for all things related to home energy efficiency in the UK, including legislation driving improved carbon emission reductions.
But EPCs come with many issues which make them an incomplete, inaccurate, and unreliable source of information about energy efficiency.
The 6 key issues with the EPC methodology are:
- Measuring costs not efficiency: the SAP methodology produces only an estimate of the costs to heat a property, which is currently being conflated with energy efficiency
- Flawed methodology: the SAP methodology dates from 2012 and uses many flawed assumptions and baseline measures, producing inaccurate results
- Confusing points system: the SAP points system is skewed and confusing to use
- Human error: energy assessors are relied on to determine the inputs for SAP calculations, which has been found to produce highly inconsistent results due to differing methods and interpretations
- EPCs are an incomplete dataset: our research found that only 49% of UK homes have a valid EPC
- Many EPCs are outdated: EPCs last for 10 years once produced, which is a long time when considering fluctuations in energy prices, carbon intensity of the grid, and the changes that can be made to a home – our research found that 26% of EPCs in existence are between 5-10 years old.
SAP is due to be replaced with the Home Energy Model (HEM) to rectify some of these issues, but the timeline for this for use with EPCs is uncertain.
In the meantime, the inaccuracy of EPC data is highly damaging for mortgage lenders.
It means:
- Climate risk blind spots both during loan origination (e.g. affordability assessments) and for back book risk analysis
- Restricted potential for green lending opportunities
- Restricted potential to drive the retrofit revolution amongst homeowners
- Liquidity risk for issuers through lack of
- Inflated financed emissions calculations – which also leads to inaccurate ICAAP provisioning.
For more details on all of these issues, head to our blog: 6 reasons that EPCs are an inaccurate measure of energy efficiency, or get a quick summary in this clip from our recent webinar on best practice transition planning for mortgage lenders:
📊 The hidden cost of (free) data
In our recent white paper we explore the limitations of EPCs and the opportunities that come with improvements to energy performance data in detail, including unique insights from our own dataset and a homeowner survey.
Go to the white paper ➡️
Is any alternative energy performance data available for lenders?
With EPC data notoriously inaccurate, are there any other additional data sources on energy performance and carbon emissions for UK housing that mortgage lenders could use beyond the EPC register?
There are various additional data sources to enhance understanding on the energy performance of UK housing do exist, such as the National Grid carbon intensity or lists of ECO4 grant installations.
However, these data sources are disparate, difficult to access, and even more difficult to consolidate into a comparable format.
One particularly common issue is unreliable address matching across different datasets – even with the advent of UPRNs it’s common to find addresses without them. This leaves lenders reliant on inconsistently labelled addresses across different sources, which are impossible to match up when consolidating the data.
That’s why at Kamma we’ve done the hard work for you – identifying all of these data sources (including the EPC register), consolidating them, checking for accuracy, and applying advanced predictive modelling to fill any data gaps.
Through this, we’ve developed the most accurate dataset on the energy and environmental performance of UK housing.
Lenders can use this for real-time energy efficiency insights during loan origination, climate risk analysis, green revenue projections, and financed emissions calculations – and to unlock a virtuous circle of green lending for retrofit.
Want to know more about how it would work for your company? Book a consultation ➡️
