What is a green mortgage? What are they and how to get one?
Homebuyers could benefit from better borrowing rates on mortgages in return for purchasing more energy efficient homes or committing to implement energy saving work within existing properties.
A bank or mortgage lender offers a house buyer preferential terms if they can demonstrate that the property for which they are borrowing meets certain environmental standards. This may be for example:
A new build home with an existing sustainability rating.
An existing building which is renovated to improve its environmental performance.
In other words, a green mortgage is a mortgage specifically targeted at green buildings.
How does a green mortgage differ to a regular mortgage?
As an incentive for the borrower to either buy a green building or to renovate an existing one to make it greener, the bank would offer them either:
A lower interest rate; or
An increased loan amount.
There is growing evidence which suggests green buildings (and their occupants) represent a lower risk investment for banks and lenders because:
Green buildings should cost less to run due to lower utility bills, meaning the borrower is in a better financial position to be able to repay their loan, thereby reducing the possibility of default.
Green buildings are thought to have an increased value – known as ‘green value’, compared to an equivalent property without any green credentials – or be more resilient to markets where properties without green credentials are becoming increasingly unattractive.
These two effects are expected to increase over time, which is an especially important consideration as mortgages often have 25 or 30 year repayment terms.
Benefits and barriers to green mortgages
Benefits:
Buildings consume lots of energy, and in the UK there is currently no legal requirement and no incentive for house-builders to build green ‘zero-bill’ homes.
There is an urgent need to increase the current rate of energy efficient building renovation from 1 to 3 per cent per year, to meet climate change targets set out in the Paris Agreement.
A green mortgage offers a way of unlocking additional finance for renovation from the private sector; bringing a whole new group of stakeholders into the campaign for green buildings.
It also puts the topic of energy efficiency and sustainability front of mind for the building owner at an important stage in the building’s life, when typically decisions about property renovations may be made. Research by the Energy Saving Trust in the UK suggests that the majority of major renovations are carried out within the first year of ownership.
Barriers
There are numerous technical and social barriers that need to be overcome before green mortgages become commonplace.
Current mortgage affordability calculations in the UK take no account of energy performance.
Banks have more work to do in understanding green buildings and developing enough data to prove that ‘green’ really does mean lower risk.
From the borrower's perspective, focusing solely on the business case is not enough. Despite good financial payback on a range of energy efficiency measures, many home owners aren't willing to invest.
The green mortgage concept needs a better marketing strategy if it’s to be successful.
Is there such a thing as a green Lifetime Mortgage?
The Lifetime Mortgage market, targeted specifically at borrowing for those aged over the age of 55, is less well-developed in terms of sustainability and environmental focus. There is currently only one Lifetime Mortgage provider in the UK. It offers a lower interest rate to new applicants with a valid Energy Performance Certificate (EPC) rating of A or B.
Some Lifetime Mortgage products have ‘green’ in their name, but this does not mean they have green credentials, so it’s important to look closely at the features and terms of each product to understand exactly what it is they offer.
Government Green Home Grant
If you’re a homeowner or residential landlord in England you can apply for a Green Homes Grant voucher towards the cost of installing energy efficient improvements to your home. Improvements could include:
Insulating your home to reduce your energy use; or
Installing low-carbon heating to lower the amount of carbon dioxide your home produces.
You must redeem the voucher and ensure improvements are completed by 31 March 2021. Vouchers will cover two-thirds of the cost of eligible improvements, up to a maximum government contribution of £5,000. If you, or someone in your household, receive certain benefits you may be eligible for a voucher covering 100% of the cost of the improvements. The maximum value of the voucher is £10,000.