Green Mortgages -what needs to happen next
With an estimated 17 million homes having an Energy Performance Certificate (EPC) rating below Band C, the UK has a lot of work to do in retrofitting these properties with energy efficient improvements to meet its ambitious net zero targets by 2050. The enormity of this task cannot be understated. England has some of the oldest housing stock in the world, with 21% of dwellings built before 1919 and 16% built between 1919 and 1945 https://www.statista.com/statistics/292252/age-of-housing-dwellings-in-england-uk-by-tenuree/ - and older properties tend to be colder and often more challenging (and expensive) to improve.
However, if Green Mortgages – where the cost of the borrowing is linked to the energy performance of the property – become more widely available, huge numbers of homeowners would be encouraged to take positive action in making their homes more energy efficient.
To give credit where it’s due, the UK government has made attempts at helping the mortgage market create new products - https://www.gov.uk/guidance/green-home-finance-innovation-fund- competition and https://www.gov.uk/government/consultations/improving-home-energy-performance-through-lenders - and lenders will soon be required to publish EPC data on the properties that they have provided mortgages for.
But, as it stands, green mortgage product availability is terribly poor. Nat West and Barclays offer very low impact incentives for purchasing a property which already has a good EPC rating. Nationwide Building Society offers home improvement loans to their existing customers at competitive rates. Other, smaller lenders such as Saffron Building Society and Kensington have been dipping in-and-out of providing solutions that, for some consumers, are fairly well-priced. In terms of product development, the shining light is Ecology Building Society - https://www.ecology.co.uk/hub/new-renovation-mortgage/.
So, where do we go from here? Considering the global economy is going through a period of creative destruction, now is the time to be bold. The former Governor of the Bank of England has consistently stated that green finance should be firmly on the agenda - https://www.un.org/en/climatechange/mark-carney-investing-net-zero-climate-solutions-creates- value-and-rewards - and that we ignore climate change risks at our peril.
Whilst most mortgage lenders will now for the EPC rating of a property, they do not ask how a property value could be affected in the future if energy efficiency measures are not undertaken. RICS are fully supportive of the development of green mortgages - https://www.rics.org/globalassets/rics-website/media/news/news--opinion/retrofitting-to- decarbonise-the-uk-existing-housing-stock-v2.pdf - so could be asked, at the point of valuation, how the future value and saleability of the property could be affected if works are (or are not) completed.
The big six high street lenders (Lloyds, Nationwide, RBS, Santander, Barclays & HSBC) continue to dominate the mortgage market in the UK and represent around 70% of all new lending. They all need to be encouraged to develop solutions that really help consumers in their quest for home energy efficiency and provide sustainable finance. However the largest barrier to the development of mass-market availability of competitively priced green mortgages is that lenders are being asked to reduce their profit margins to create products, at a time in which many will feel they are already suffering sustained pressure from the economic impact of the pandemic, mortgage payment holidays and broad market competition.
There is a solution. Lenders have capital requirements for mortgages, and these requirements are lower for lower risk loans - https://www.bankofengland.co.uk/prudential-regulation/publication/2020/internal-ratings-based-uk-mortgage-risk-weights-managing-deficiencies-in-model-risk-capture Green mortgages are generally heralded as lower risk loans-https://www.fitchratings.com/research/structured-finance/covered-bonds/data-disclosure-are-key- for-green-mortgage-analysis-30-11-2020 - so the PRA could reduce the lender’s capital requirements for this type of product. This in turn would reduce the costs associated with providing a green mortgage and could be passed on to the consumer in the form of discounts and incentives.
A lot of work will need to be undertaken and, for many, this may seem to be too large a task. How do you start defining what a green mortgage is? Won’t we be in danger of creating new mortgage prisoners, if people in older, drafty, damp homes cannot access cheap finance? With all this in mind, I am reminded of Greta Thunberg’s comment “You must take action. You must do the impossible. Because giving up is never an option.” Now indeed is the time for action.
If you require further information, contact Matthew Fleming-Duffy at www.cherryfinance.co.uk on +44 (0) 1202 925365 or email matt@cherryfinance.co.uk.