Updates to eligibility of residential mortgage collateral in the Sterling Monetary Framework to reflect the Domestic Minimum Energy Efficiency Standard (MEES) Regulations - Market Notice 23 May 2024

This market notice (the Market Notice) forms part of the SMF Documentation for the Bank of England’s (the Bank) operations under the Sterling Monetary Framework (the SMF) and should be read in conjunction with the other SMF Documentation, each as supplemented and amended from time to time.
Published on 23 May 2024

Market notice

This Market Notice sets out changes to collateral eligibility that the Bank is making to manage financial risks in residential mortgage collateral in the Sterling Monetary Framework (SMF). All changes set out in this Market Notice will become effective on 1 August 2024.

Eligibility criteria

As set out in the Domestic Minimum Energy Efficiency Standard (MEES) Regulations, since 2018, rental properties in England and Wales are required to have a current EPC rating of at least ‘E’– or a valid exemption – to be let out. 

To mitigate risks associated with non-compliant properties, the Bank is updating its eligibility criteria for Buy-to-Let (BtL) mortgages. Specifically, non-compliant mortgages will no longer be eligible as collateral in the Bank’s SMF operations. Where a property has a valid exemption in place, the SMF counterparty must confirm this to the Bank in order for the mortgage to be eligible as SMF collateral. 

BtL mortgages for which SMF counterparties do not provide EPC ratings that are originated after 1 August 2024 will likewise be ineligible as SMF collateral. For BtL mortgages originated before 1 August 2024 with no reported EPC ratings, the Bank will apply a tiered treatment to recognise some challenges that lenders face in obtaining comprehensive EPC data for their back books. 

For operational reasons, the Bank will not require SMF counterparties to remove affected loans from their mortgage pools. But they will be assigned zero nominal value or, in the case of mortgages originated before 1 August 2024 with no reported EPC ratings, a reduced nominal value.

These changes to the Bank’s eligibility criteria do not apply to owner-occupied mortgages.

Haircut adjustments

The EPC ratings, to which the MEES Regulations are linked, measure a property’s energy efficiency, and provide insights into mortgagors’ exposure to energy price shocks. In this context, the Bank is adjusting its haircut models to protect the Bank against potential financial losses arising from mortgagors’ exposure to energy price shocks in owner occupied mortgage collateral. Relevant mortgages with no reported EPC ratings will be subject to conservative assumptions, which will tend to increase collateral haircuts relative to a scenario in which counterparties provide EPC data. These adjustments will be rolled out alongside similar measures to protect against possible financial losses from the risk of more frequent and severe flooding.