Could a green mortgage be the way forward for homeowners who wish to make changes that will cut down their energy bills but can’t afford the initial outlay?
In April, research carried out by Censuswide for The Mortgage Advice Bureau revealed that nearly one in four households are planning to make home improvements to try to reduce their energy bills. This growing trend is not surprising, given the ongoing cost of living crisis, but with such improvements typically running into several thousands of pounds, the cost is an issue for many.
Although there is no agreed industry definition of what a green mortgage is, this usually describes a product with preferential terms (such as a discount on the interest rate and/or cashback) for properties that meet environmental standards, as evidenced through their Energy Performance Certificate (EPC) rating. This could be in relation to a house purchase with a good EPC rating (often ‘A’ or ‘B’) or for additional borrowing to improve the property’s EPC rating.
Green mortgages also make sense from a lender perspective, too. The risk is likely to be lower, with valuations increasing for energy efficient homes in comparison to ‘brown’ properties, and potentially fewer defaults arising from lower household bills.
Green mortgages: a growing market
While green mortgages may not be new – Ecology Building Society, for example, has supplied them for many years – the market is definitely growing. Analysis by Defaqto shows that there were 648 such products available in April 2022, an increase of 18% in just six months, with lenders such as Swansea Building Society, Skipton and Monmouthshire launching their offerings in recent months.
We anticipate further growth in this market driven by a number of factors aside from a reduction in energy bills, such as:
- Legislation requiring new tenancies of rental properties to have an EPC rating of ‘C’ or above by 2025 (and all tenancies from 2028), as well as lender disclosures such as the Task Force on Climate-related Financial Disclosures (TCFDs) by the same year.
- Political pressures to move to a green economy and reduce emissions, with residential properties estimated to make up 15% of the UK’s total climate emissions according to government data.
- Demand from customers increasingly looking at environmental and ethical considerations as part of their buying decisions.
Innovation is also evolving, with Tandem Bank recently introducing a ‘green second charge’ product and Quantum Mortgages introducing a ‘green loan-to-value (LTV) boost’ product, whereby an additional 2% may be lent on energy efficient properties or where the borrower commits to achieve this.
Further product developments seem likely to help to address the enormity of the environmental challenge, with figures suggesting nearly 13 million homes (60%) currently have an EPC rating below ‘C’ – which is the minimum standard that the UK Government is seeking by 2035.
Further green challenges
Some market observers are calling for more to be done to encourage improvements to older properties rather than focus on the ‘quick wins’ of discounts for new builds – just over 3% of older properties have an EPC rating of ‘A’ or ‘B’ compared to 83% of new builds. There are also concerns that some borrowers may become ‘trapped’ in an older property where a good EPC rating has not been achieved (such as through lack of awareness, inaction or where the property is unsuitable for green improvements), and consequently the property becomes unsellable.
Other experts are worrying that lenders may cherry pick mortgages where the property already has a good EPC rating in order to improve the ‘greenness’ of their mortgage portfolios when subjected to climate disclosures. Then there is the question of the EPC rating system itself, with reports suggesting that the installation of a ground or air source heat pump, while emitting less CO2 than a gas boiler for example, could actually worsen the EPC rating, which is calculated as an estimate of what it costs to heat a home.
The role that technology plays
These challenges, together with the fundamental questions of how much a green mortgage will cost and exactly what energy savings can be generated, are likely to be a barrier for some customers, no matter how well intentioned.
The answer to some of these challenges could lie in modern lender technology. The ability to gain insight through rich, new sources of data and present this to a borrower, broker or underwriter in an easy to understand way is being made possible through application programming interfaces (APIs) in conjunction with a healthy eco-system of partners, AI and data analytics.
Embedding technology that can assess green credentials and personalise mortgage offerings from rates to risk profile to individuals’ circumstances will help lenders to truly personalise their propositions for customers. Doing so ultimately supports the lender’s societal role to act on the ESG agenda and engage in the wider debate to support homeowners in becoming sustainable and improving their existing home.
Why shouldn’t customers benefit from cheaper rates or incentives if they have made or want to make green improvements? Surely this can only be right. As ever, the key will be to use these tools to deliver a great experience that informs, simplifies and really delivers for the customer.