Why lenders are paying close attention to solar panels?

As we keep hearing how energy-efficiency measures can increase a property’s value, it’s worth keeping in mind not all improvements are created equal – at least not in the eyes of mortgage lenders.

Just as with spray foam insulation, some green upgrades actually run the risk of lowering a property’s value or making it unmortgageable.

One such installation that is increasingly catching mortgage lenders’ attention is solar panels and the contracts attached to them.

As energy prices continue to rise and more people look to potentially save money by having them fitted, it’s important homeowners pay close attention to the contracts they are signing.

As with most things, the devil is often in the detail.

Between 2010-2019, the UK saw somewhat of a boom in solar panel installations, driven by the launch of the Government’s Feed-in Tariff (FIT) scheme.

The scheme was designed to promote renewable and low-carbon electricity by paying households for every unit of electricity they generated and exported to the National Grid.

This led to a surge in lease agreements, or ‘rent-a-roof’ schemes as they became known, whereby companies would install solar panels free of charge in exchange for being able to claim the FIT payments.

While homeowners benefited from reduced energy bills, some contracts included onerous terms and granted certain property rights to the leasing company.

The FIT scheme ended in 2019 and was replaced by the Smart Export Guarantee (SEG) scheme, which was less generous and led to a decline in rent-a-roof companies.

However, given many of the lease agreements had terms of 20-25 years, thousands of homeowners still have contracts in place and may not realise the full implications of what they’ve signed until they come to sell their property.

Mortgage lenders are now closely examining these contracts, and in some cases, refusing to lend on properties that have particularly draconian contracts in place.

As more borrowers look to their broker for advice on energy-efficiency related issues, it’s important to be aware of some of the issues surrounding solar panel agreements and how this might affect a borrower’s mortgage prospects.

How solar panel contracts differ

When it comes to installing solar panels, there are three main routes a homeowner can take.

The first and most straightforward option is to buy them outright.

Generally speaking, this is the preferred option for mortgage lenders as the solar panel company does not have any rights over the property.

Most lenders however will still want to ensure the installation was carried out by a Microgeneration Certification Scheme (MCS) accredited contractor.

The second option, as mentioned, is a leased contract.

While each contract is different, this is generally the arrangement homeowners should be most cautious of.

Although many of these schemes have closed, some are still in existence, and it would be a good idea for the homeowner to seek legal advice before signing up to one.

In some cases, the leasing agreement can give the leasing company significant control over the property.

For example, they might need to give consent for the property to be sold or for an extension to be carried out.

This is especially true if the homeowner wants to carry out any work that might affect the panels, such as a loft conversion.

If the homeowner does anything that lowers the panels’ output, even their temporary removal for urgent roof repairs, some contracts stipulate that the company can charge the homeowner for lost revenue.

It can also be unclear who is responsible for maintaining and repairing the panels, which can become a problem as the panels age.

As part of the underwriting process, lenders will examine the suitability of the lease agreement, as well as any costs involved if the property is sold or repossessed.

The third option for solar panels is the newer ‘subscription’ model. Similar to a lease agreement, the solar panels and battery system are usually installed at no upfront cost, with the homeowner taking out a loan and making monthly repayments to also cover maintenance and repair costs.

At the end of the subscription, which can last up to 20 years, the homeowner will usually own the panels outright.

While the terms of these contracts tend to be much better than the older lease agreements, homeowners still need to examine the contracts carefully to understand any potential rights they might be handing over.

As with all contracts associated with the property, lenders will want to ensure the terms are fair, do not restrict the transfer of ownership, and any costs involved are reasonable.

Seeking professional advice

While it’s good to see more homeowners looking to carry out energy-efficiency upgrades, it’s important they understand exactly what they’re getting into and signing up for.

Solar panels can be a great option for improving a home’s energy-efficiency, but as with any work carried out, they need to be installed correctly and expert advice given.

Through our work with our own accredited Domestic Energy Assessors (DEAs), who are qualified to assess homes and recommend improvements, we understand the benefits energy upgrades can bring to properties, often through simple measures such as proper insulation.

As we continue down the retrofitting path and more homeowners carry out energy-efficient upgrades, it’s increasingly important homeowners seek professional advice.

Not all energy-efficiency upgrades will be suitable for every property, and homeowners need to be wary of falling into the trap of assuming all upgrades will add value to their home.

Simon Jackson is Managing Director of SDL Surveying

First Published with The Intermediary