Green Mortgages: Could Your Loan Help Make Britain Greener? | Mortgages
Homes represent over a fifth of the UK’s total CO2 emissions, which may help explain why the government and others think green mortgages could be a game-changer for a sustainable future.
While they’ve been around in one form or another for some time, green mortgages have yet to take off: a survey released this week found that 94% of brokers had never sold one.
However, Nick Mendes, technical manager of mortgages at brokerage John Charcol, estimates that there will be “a huge tide change” in the mortgage market next year in terms of what is available.
For a long time, it was pretty much just the green building company that sold green mortgages, but new products have been coming in droves and quickly lately.
Many of the UK’s biggest financial players are now offering products, although the financial incentives for some transactions are quite negligible.
Generally speaking, a green mortgage rewards a person who buys or owns an energy-efficient home by offering them more favorable terms than usual. Right now, that usually means getting a slightly lower interest rate, or cash back when you take out the mortgage, or both. Some offers are reserved for people buying new property.
In addition, some lenders are offering their existing mortgage customers additional loans at reduced rates to pay for green upgrades such as replacing drafty windows, upgrading an obsolete heating system, or adding solar panels.
Last month, the government said it wanted to support the development of a competitive market in this area and was exploring plans to tie mortgages to green home improvements by impose targets on banks and building societies.
At the heart of it all are energy performance certificates (EPC). An EPC is required every time a property is built, sold or rented. It gives the building an energy efficiency rating from A (most efficient) to G (least efficient).
Eligibility for many green mortgage offers is tied to the property’s EPC rating – for example, it may need to be A or B. However, properties that have not been sold or rented since. a long time – including several millions – will not have one.
A big problem is the fact that the UK’s building stock is notoriously old and leaky, and this particularly applies to some of the most sought-after properties by buyers, such as many Victorian and Edwardian terraces with their floors and windows original but coveted sash. Last month, the government said that in England in 2019, around 15 million homes – 60% of the total – were below the C EPC band. He pledged to retrofit “as many homes as possible” to reach the C EPC band by 2035 “where cost- effective, practical and affordable”.
However, Sarah Coles of investment firm Hargreaves Lansdown says that while some homes can be retrofitted relatively inexpensively, other homeowners will find it prohibitive.
A recent study by Nationwide Building Society found that the average bill for upgrading a property to achieve a C band rating was around Â£ 8,100. Installing all of the energy retrofit measures recommended for homes currently rated F or G would incur the highest cost, he said: around Â£ 25,800. You will benefit from savings on your energy costs, but the financial return on investment could take many years.
Earlier this year, the Rightmove real estate site declared his research reported that in England and Wales there were almost 1.7 million homes currently rated between D and G that cannot be upgraded to achieve a C rating.
What is on offer now?
Right now, green mortgage borrowers tend to be rewarded with lower interest rates or cash backs, according to Mark Harris, managing director of mortgage broker SPF Private Clients.
Lenders offering the former include NatWest and Barclays. For example, NatWest offers a reduced rate on a two or five year fixed rate mortgage, with cash back in some cases. To qualify, the property you buy or remortgage must have an EPC rating of A or B. With some offers, the rate reductions are very small. For example, at the time of writing this article, NatWest offered a standard two-year fix with a rate of 1.08% for a loan-to-value ratio (LTV) of up to 60%, with a repayment of Â£ 150. The green version of this mortgage had a rate of 1.07%, with Â£ 250 cashback.
Some of NatWest’s other offers gave you a little more bang for your buck: For those hoping to remortgage, there was a standard five-year solution of up to 85% LTV at 2.58%, with no cash back. With the green version you paid 2.49% and received Â£ 350 cashback.
However, Harris says that while NatWest’s green mortgages may be a bit more expensive than the lender’s basic lineup, there may be cheaper offers elsewhere. For example, while NatWest offered a two-year green patch at 1.17%, HSBC offered a two-year non-green patch at 1.04% (both were available up to 75% LTV and had fees almost identical).
âEach lender has a slightly different approach to what constitutes green property,â says Harris. With some, you have to buy a new build directly from the builder or developer. This is the case with Barclays, which requires an EPC A or B rating.
In April, Nationwide launched its Green Reward program, which grants those who buy a home with one of its mortgages a cash back of Â£ 250 if it has a high B rating or Â£ 500 if the property is rated. A. So far around 1,000 payments have been made through the program, with 90% of beneficiaries receiving Â£ 250.
Likewise, the Halifax offers Â£ 250 cash back when a property is rated A or B.
Meanwhile, some lenders such as Nationwide and TSB are offering their existing mortgage customers a reduced âgreen extra loanâ rate if they make energy efficient home improvements.
Then there are specialized players such as Ecology, which offers mortgages for projects such as self-construction, renovation and conversion where energy efficiency is a central element.
When it comes to rental mortgages, things are going faster. âLandlords have a greater incentive to be green due to new regulations introduced from 2025, with rented properties having to be rated C or higher. The change should be implemented gradually, starting with new rentals of six months or more, followed by all rentals from 2028, âHarris said.
Over the next few months, we’ll start to see dramatic changes in the mortgage market, says John Charcol’s Mendes. We might start to see fixed rate offers emerge where, for example, the rate you pay within the set time frame goes down if you make certain green improvements.
Mendes believes there might also be changes when it comes to the affordability of mortgages, where a person with an energy efficient property might be able to borrow more based on what their energy bills and costs will be. lower.