Green Deal Finance for Landlords – will it be viable?

by Mark Alexander

9:14 AM, 31st October 2012
About 7 years ago

Green Deal Finance for Landlords – will it be viable?

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Green Deal Finance for Landlords – will it be viable?

Green Deal FinanceGreen Deal Finance is likely to become a major discussion topic on forums, especially as it is now being reported by Green Deal Assessors  going through training that it will cost between 7% and 8%.

At current interest rates that far more expensive than the cost of borrowing on a buy to let mortgage. Therefore, if a landlord is buying a property in need of replacement windows and a new boiler some may say that it is expensive form of funding. The counter argument of course is that borrowings funded via Green Deal Finance will in fact be paid for by tenants and subsidised by lower fuel prices .

The big question for me is whether tenants will accept that they really ought to pay the loan without asking for a reduction in rent or looking at an alternative property without a Green Deal Finance deal attached to it.

Having debated this topic with many in the industry I’m still very much on the fence.

Let me put this scenario to you:-

You are able to buy a property for £100,000 and you need to spend £30,000 on it to refurbish. Your lender will advance 75% of purchase price and allow you to draw down up to 75% of the  property value when the refurbishments are completed. The estimated property value post refurbishment is say £180,000 which means that you could end up with a mortgage of £135,000, i.e. £5,000 more than you have spent. OK, this is an imaginary deal and I have not factored in whether the deal would be stack on on cashflow etc. but please run with me on this.

Now, let’s assume that £10,000 of the refurbishment is the cost of UPVC double glazing and a replacement boiler which is financeable under the green deal.

QUESTION

Should the landlord take the £10,000 Green Deal Finance and have £10,000 extra in his liquidity fund or an extra £10,000 of equity in the property, OR, should he NOT take the Green Deal Finance and with a view to making his property more attractive to potential tenants who will see that they are benefiting from lower energy bills and are not paying of the landlords Green Deal Finance?

It’s quite a conundrum isn’t it?

Where I can see Green Deal Finance being incredibly useful is finance of the last resort. Just suppose the example deal quoted above doesn’t quite stack up. If the value came back in at £160,000 the maximum buy to let funding would be £120,000. That’s a £10,000 shortfall on cost. If the landlord needs to recover that £10,000 then Green Deal Finance may be his only option.

 



Comments

Neil Patterson

9:36 AM, 31st October 2012
About 7 years ago

Just found a quick guid on the .gov site about cash back available on the green deal e.g. £270 for a boiler. see http://www.decc.gov.uk/en/content/cms/tackling/green_deal/gd_quickguides/gd_quickguides.aspx

17:05 PM, 31st October 2012
About 7 years ago

Will the boiler and UPVC double glazing cost more or less with the green deal? It may be that the cheaper companies will not be setup to install under the green deal, or it may be that a “green deal broker” gets very good discounts for arranging a lot of work and passes some of them on.

Mark Alexander

17:12 PM, 31st October 2012
About 7 years ago

Very good point, I'd not thought of that.

0:30 AM, 5th November 2012
About 7 years ago

Hello Mark,

Am I missing something here. I am currently considering and applying to become a GD provider (currently I own and advise on commercial and residential finance as a broker and own investment property) and this is my conclussion;

As it is the tenant/s who pays for the cost of improvements under the Green Deal (i.e. the energy user), it is the tenant who foots the bill and thus leaves the landlord with these distinct benefits, the landlord

1. Will spend less capital – tell me one landlord that isn’t tight with money (apologies for the sweeping statement ;o) ),

2. Will not use up part of his available credit line – with credit so tight, a definite important benefit,

3. Is not concerned about increasing interest rates – that is the concern of the GD plan,

4. Importantly, will not reduce his equity stake in the property – if the property is a short-term investment a no brainer, if long-term still a considerable advantage.

The tenant can also consider himself/herself a winner as he/she

1. Has a more energy efficient, well insulated and heated property,

2. Gets these benefits at no extra cost over pre-installation energy energy charges,

3. Reduces energy consumption and in turn insulates their budget from future energy price increases.

4. Although not certain yet, it may be possible that providers of the GD finance will offer fixed rates of interest in order that the GD Plan remains within the “Golden Rule**”

(** i.e. the GD charge, paid via the tenants electricity bill, is not more than the savings which arise from those improvement measures).

2:38 AM, 5th November 2012
About 7 years ago

Can I clarify point 3.

"Reduces energy consumption and in turn insulates their budget from future energy price increases."

That is to say, the Tenant will be insulated from energy price increases to the energy usage elimintaed via the measures installed.

7:45 AM, 5th November 2012
About 7 years ago

Hi

The green deal deal is not yet a fully formed jigsaw and there are lots of problems and hurdles to over come to make it work. Though I am in favour of the general idea. The golden rule may not work in some cases.

One reason is that the green deal providers have the right to increase the payments each year after the first year. The second reason is that as an advisor you can still carry out a green deal report without the customers energy bill to hand. This will mean that the calculation for the golden rule will
be inaccurate. Also from the training that I've had I do believe that the loan is NOT going to be interest free. Yup there are some problems to sort out between now and the end of January..

Mark Alexander

7:51 AM, 5th November 2012
About 7 years ago

Hi Chris, I follow the ideology and you have summarised that very well. What you haven't done though is address the concerns that I've raised. perhaps only time will tell me whether or not they are justifiable.


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