Green mortgages

Save money and help the planet

There is continued focus from lenders to provide Green Mortgages products and something that is likely to increase over the coming years. The main attraction of green mortgages is that they offer lower interest rates or extra capital and put energy efficiency at the forefront of both the lenders and buyer’s thinking.

Many of the current green mortgages provide a lower rate when a better energy efficiency rating is in place. However, there is a growing focus for providing mortgages that can help to improve a home’s current rating.

Most common current types of green mortgages:

1. 1. A cheaper rate for a home (purchase or remortgage) with better energy efficiency ratings

1. 1. A mortgage to allow capital release of funds to pay for improvements to a home’s energy
      efficiency

Reducing a property’s carbon footprint

Using a green mortgage can be used to reduce a home’s carbon footprint and help recoup any investment by saving money on energy bills. A good energy performance certificate (EPC) rating could even help the property’s value increase, as it can be an indicator of lower running costs. And this is something that is expected to have more influence in the coming years

The UK is signed up to the Paris Agreement to limit global warming to 1.5°C and aims to reach net zero emissions by 2050 (Scotland aiming for 2045). As part of this target, UK government has been in talks with major mortgage lenders and new home builders and have stated that making homes energy efficient is a vital part of that journey.

The use of household expenditure

UK homes must have an up-to-date EPC when rented or sold. Homes receive an energy efficiency rating (known as an EPC) between A and G. On this scale ‘A’ is the most energy efficient and ‘G’ the least.
However, new homes often have higher ‘A’ or ‘B’ rating and older, properties may carry a lower rating.

When looking at a mortgage, household spending (including energy bills), is part of a lender’s affordability calculation and most lenders factor in a standard energy bill as 4.4% of a household’s total expenditure.

Allowance to spend more towards mortgage payments

For example, a family of four living in a ‘G’ rated property would be assumed to be spending £200 a month on fuel bills. But that drops to £50 a month if they were living in an ‘A’ rated home.

Green mortgages take EPC ratings, and their impact on energy expenditure, into account. That means people buying ‘A’ or ‘B’ rated houses may be able to borrow more, because the less spent on energy, the more available towards mortgage repayments.

Borrowing to pay for improvements

The Energy Saving Trust suggest improving an energy efficacy rating by two EPC bands could add up to around £4,000 in additional mortgage finance, thanks to monthly savings on fuel bills.

Lenders are designing products to try to encourage home energy efficiency by offering lower mortgage rates to allow people to borrow money to pay for improvements that increase EPC ratings and bring energy bill savings. Some discounts apply once the work has been completed, while others insist that a certain percentage of released funds must be spent on energy efficiency measures. Some require that the completed work brings the house to a specific EPC rating.

Energy efficiency measures

All houses are different, so it’s not as simple as just putting in double glazing and hoping for the best. The age, design and previous works and improvements at a property all have a factor as to what can be done to improve an EPC rating.

A green mortgage does not mean a lender will give advice on what work to carry out, so It’s important to install energy efficiency measures appropriate to the building and in the proper order. Heat pumps are a good example – they work particularly well when fitted in well-insulated houses.

Improving an EPC rating can provide a range of benefits, these include:

Lower energy bills

Reduced carbon footprint

Possible lower mortgage rates through green mortgages

Improving house resale price

Increased mortgage borrowing levels

Helping the UK reach net zero

Private landlords also need to improve a property’s EPC ratings with the requirement to meet at least band ‘E’ for let properties.

The UKs housing market requires substantial energy efficiency investment to help reach net zero. Green mortgages to improve energy efficiency could therefore grow into one of its most substantial branches alongside new regulations and guidelines for home builders already being put into place.

February 2022

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home/property may be repossessed if you do not keep up repayments on a mortgage.