It is just over four years since the first green mortgage was launched by a mainstream lender. In that time, green mortgages have slowly gathered momentum — helped in 2019 by the pledge of former Conservative prime minister Theresa May’s government to make the UK carbon neutral by 2050.
If that target is to be achieved, brokers and lenders have a part to play in accelerating the growth and take-up of not just green mortgages but wider energy efficiency measures among homeowners.
Limiting factors
“There is an appetite for green mortgages but in most cases they are suitable only for properties built within the past 30 years, or those with a current EPC of C or above, which is typically a new-build,” says Harmony Financial Services director Imran Hussain.
Brokers must ensure that clients with an energy-efficient home are made aware of the advantages
“This is limiting the uptake of such products.The main priority for younger borrowers, for now at least, is finding a home at all, given the lack of stock, and then whether they can secure a mortgage. Whether or not that mortgage is green is typically the last thought on their mind.”
Green Mortgages managing director Michael Kallaras feels there is insufficient exposure, understanding and education around the products.
“The average consumer probably has not heard of a green mortgage, so it is up to brokers to add value to their proposition for clients who have an energy-efficient home, and ensure that they are made aware of the advantages,” he says.
“Also, at the moment such borrowers will get a minor discount to their interest rate, a lower fee or some cash back. More needs to be done by lenders to increase the incentives, and consequently the uptake, on green products.”
Valuation impact
Although Rightmove’s research suggests properties with a better EPC rating command a higher price, at present a higher EPC does not, in itself, translate to a higher valuation, according to SDL Surveying managing director Simon Jackson.
A serious change needs to happen in order for more people to make their properties greener
He does, however, expect a property’s EPC eventually to have a bearing on its valuation as EPCs grow in importance.
“There is no hard-and-fast rule to suggest that a D-rated property, for example, is worth less than a C-rated one,” says Jackson.
“Given what is happening in the energy markets and how this is translating into utility bills, however, it seems obvious to think it will have much more of a bearing in the future.”
For the mortgage market truly to have an impact on people’s choices, mortgage deals need to reward green improvements
He will watch with interest to see if EPCs begin to impact property values more in the coming years.
“We anticipate they will, but this will depend on the government confirming legislative changes around EPCs, starting with the anticipated changes for land-lords in terms of their ability to keep on letting out property if it is below a C-rated level.
“If/when these come into effect, lenders are likely to start factoring energy efficiency into mortgage-lending decisions. In other words, it could become harder to get a mortgage on a property with poor energy credentials,” he says.
Jackson believes buyers will become more energy conscious in the coming months and years, in light of the energy price increases and climate extremes experienced this summer.
There is an appetite for green mortgages but in most cases they are suitable only for properties built within the past 30 years
“This could have a growing impact on sale-ability for properties with a poor energy rating, coupled with the predicted mortgage-ability impact,” he explains.
What needs to change
While there is a good case for making homes more energy efficient, there seems to be both a lack of know-ledge about green mortgages and not enough incentives for buyers.
“For the mortgage market truly to have an impact on people’s choices to go green, mortgage deals need to reward green improvements,” says Carl Summers Financial Services financial adviser Scott Taylor-Barr.
“Benefits like cashback vouchers that can only be spent on green products, or interest rate reductions for each EPC band you move to, are what is needed. We have only a few deals that give a marginally better interest rate for houses that are already energy efficient, or a small cashback element for spending on green improvements.”
Helping borrowers make greener choices
Taylor-Barr adds: “This is hardly a surprise as the margins in mortgages are very small and there is not much reward that a lender can give away.
“It would require a more significant reward for the lender — in terms of the capital rules, for example — to allow them the extra margin to then pass on, to actually change customer behaviour.”
Kallaras agrees existing incentives are not enough, but suggests more innovative solutions may be afoot.
“One high-street bank we have been talking with is thinking of increasing its affordability model for green homes, which seems an attractive proposition,” he says.
A more joined-up approach from all parties is what will make the biggest impact, suggests Access Financial Services chief executive officer Karl Wilkinson.
“Vendor-led incentives that can be advertised by the estate agent, and then bigger lender discounts and government backing are needed, such as stamp duty [SD] reductions. But these all need to work together if the government wants all houses to be A or B rated,” he says.
“If I was a buyer and I knew my SD would be discounted for a higher EPC-rated property, I would want to only buy green. Likewise, as a vendor I would do what I could to my house to get it green before it went on the market, so it would sell quicker.”
We are likely to see lenders reviewing their backbooks to try and understand what they have and what improvements are required
Although both buyers and sellers may want to improve the energy efficiency of their home, in the current economic climate many don’t have the money to do so, believes Finanze head of regulated and term finance Imogen Sporle.
“The cost of making a home more energy efficient far outweighs the benefits of a lower rate and lower fees,” she says.
“A serious change needs to happen in order for more people to make their properties greener. A grant or interest-free loan needs to be put in place for these types of work; especially for lower-income families. That way, clients actually have an option, the money is there. If you want to improve the EPC and if you put the time and effort into this, you will be rewarded with lower rates.”
‘Green is good’
Helping borrowers make greener choices, either through a green mortgage or by carrying out energy efficiency measures in their home, is not without its challenges, especially in the current rising interest rate environment.
“Understandably, there is a lot of worry about rates and affordability. And what we tend to see at such times is the more niche options being curtailed first,” says Jackson.
If I was a buyer and I knew my SD would be discounted for a higher EPC-rated property, I would want to only buy green
“That said, as a longer-term trend in the mortgage market it seems obvious to state that green is good, and lenders will have to act, particularly with regard to those borrowers on their books who currently have properties with poorer EPC ratings.”
He adds: “We are likely to see lenders reviewing their backbooks to try and understand what they have and what improvements are required.”
The task ahead is a big one. But it also represents a huge opportunity, for both brokers and lenders, to inform and advise their clients on an issue that, over the next decade, will become fundamental to the housing market.
This article featured in the November 2022 edition of MS.
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