It’s been just over four years since the first green mortgage was launched by a traditional lender. Meanwhile, green mortgages have slowly gained momentum – helped in 2019 by former Conservative Prime Minister Theresa May’s government’s pledge to make the UK carbon neutral by 2050. If that goal needs to be achieved, brokers and lenders have a role to play in accelerating the growth and adoption of not just green mortgages, but broader energy efficiency measures among homeowners.
Brokers must ensure that clients with an energy-efficient home are made aware of the benefits
“There is an appetite for green mortgages, but in most cases they are only suitable for properties built within the last 30 years, or those with a current EPC of C or higher, which is usually a new construction,” said the head of Harmony Financial Services. Imran Hussain. “This limits the use of these products.
The top priority for young borrowers, for now at least, is finding a place to live, given the lack of inventory, and then finding out if they can get a mortgage. Whether or not that mortgage is green is usually the last thought that comes to mind.
Green Mortgages managing director Michael Kallaras feels there is not enough exposure, understanding and education around the products. “The average consumer probably hasn’t heard of a green mortgage, so it’s up to brokers to add value
to their proposition for customers who have an energy-efficient home and make sure they are made aware of the benefits,” he says. “In addition, for the time being, these borrowers will receive a minor discount on their interest rate, lower fees or
some cashback. Lenders need to do more to increase incentives, and therefore adoption, of green products.
Although Rightmove’s research suggests that properties with a higher EPC rating command a higher price, at present, a higher EPC does not, by itself, translate into a higher valuation, according to the managing director of SDL Surveying, Simon Jackson.
However, he expects that a property’s EPC will ultimately affect its valuation as EPCs gain prominence. “There is no hard and fast rule to suggest that a D-rated property, for example, is worth less than a C-rated property,” Jackson says. “Given what’s happening in the energy markets and how that translates into utility bills, it seems obvious to think that it will have a lot more impact in the future.”
For the mortgage market to truly impact people’s choices, mortgage deals must reward green improvements
He will watch with interest if EPCs begin to have a greater impact on property values in the years to come. “We expect they will, but it will depend on the government confirming the legislative changes relating to EPCs, starting with the changes planned for landlords in terms of their ability to continue to rent properties if they are below a C level. “If/when these come into effect, lenders are likely to start factoring energy efficiency into their mortgage lending decisions. In other words, it might become harder to get a mortgage on a property with poor energy credentials,” he says. Jackson thinks shoppers will become more energy-conscious in the months and years to come, in light of energy price increases and weather extremes experienced this summer. “This could have an increasing impact on the ability of properties with poor energy ratings to sell, coupled with the expected impact on mortgage ability,” he explains.
What needs to change
While there are good reasons to make homes more energy efficient, there seems to be both a lack of knowledge about green mortgages and not enough incentives for buyers. “For the mortgage market to truly impact people’s choices to go green, mortgage agreements must reward green improvements,” says Scott Taylor-Barr, financial adviser at Carl Summers Financial Services.
“Benefits like cash back vouchers that can only be spent on green products, or interest rate discounts for every EPC band you switch to, are what we need. We don’t have only a few offers that offer a slightly better interest rate for homes that are already energy efficient, or a small cash back element for spending on green upgrades.
Helping borrowers make greener choices
Taylor-Barr adds, “It’s not a surprise because the spreads on mortgages are very low and there’s not much reward a lender can give.
“That would require a bigger reward for the lender – in terms of capital rules, for example – to allow them the extra margin to pass on then, to actually change customer behavior.” Kallaras agrees that existing incentives are not enough, but suggests that more innovative solutions could be on the way. “One high street bank we spoke to is considering increasing its affordability model for green homes, which seems an attractive proposition,” he says.
A more concerted approach by all parties is what will have the greatest impact, suggests Karl Wilkinson, managing director of Access Financial Services.
“Seller-led incentives that can be advertised by the real estate agent and then larger discounts for lenders and government support are needed, such as stamp duty [SD] discounts. But it all has to work together if the government wants all houses to be A or B rated,” he says. “If I was a buyer and knew my SD would be
reduced for a higher EPC rated property, I would only buy green.
Likewise, as a seller, I would do what I could to green my house before it
went to market, so it would sell faster. While buyers and sellers may want to improve their home’s energy efficiency, in the current economic climate many don’t have the money to do so, believes Imogen Sporle, head of regulated and term finance at Finanze. “The cost of making a home more energy efficient far outweighs the benefits of lower rates and fees,” she says. “Serious change needs to happen for more people to green their properties.
A grant or interest-free loan should be in place for these types of work; especially for low income families. This way customers actually have an option, the money is there. If you want to improve the EPC and put in the time and effort, you will be rewarded with lower rates.
“Green is good”
Helping borrowers make greener choices, either through a green mortgage or by implementing energy efficiency measures in their home, is not without challenges, especially in today’s rising interest rate environment. “Naturally, there’s a lot of concern about pricing and affordability. And what we tend to see in those times is that the niche options are narrowed down first,” Jackson says.
“That said, as a longer-term trend in the mortgage market, it seems obvious to say that green is good, and lenders will need to act, especially when it comes to borrowers on their books who currently have properties with lower EPC ratings.”
He adds: “We are likely to see lenders reviewing their books to try to understand what they have and what improvements are needed.”
The task before us is great. But it is also a wonderful opportunity, both for brokers and for lenders, to inform and advise their clients on a problem which, more
the next decade, will become fundamental for the housing market.