5 things you need to know about green mortgages
The UK’s ambition for a green economy has seen an explosion of new products and services enter the market. One such option now being offered by some mainstream lenders is green mortgages. Here we list 5 things you need to know about green mortgages to help you when having such discussions with clients.
No.1 – What is a green mortgage?
A green mortgage is simply a mortgage that rewards homeowners for purchasing an energy-efficient property or renovating an existing property to make it greener. Lenders are increasingly seeing energy-efficient properties as being less risky purchases, as well as being more likely to hold their value. As such, green mortgages often feature incentives such as lower interest rates, cashback schemes, and increased loan options.
Green mortgages generally fall into 2 categories: those rewarding people for purchasing/living in an energy-efficient home, and those rewarding people for carrying out ‘green’ improvements such as installing solar panels or improving heating systems.
No.2 – How is a property classed as green?
Whether a building is classed as green or not currently depends on its Energy Performance Certificate (EPC) score. An EPC is a document detailing how energy efficient a property is. Valid for ten years, an EPC is required whenever a property is built, bought, or sold.
Graded from A to G, with A being the highest and G the lowest, current statistics estimate 82% of EPC certificates created in the first three months of 2022 had an energy rating of A or B. While this is encouraging, there is still a long way to go to reach the government’s aim of all homes having an EPC rating of at least C by 2035. Estimates suggest that just 10% of homes built before 1900 currently have a rating of C or higher.
EPC ratings for properties in England, Wales, or Northern Ireland can be found here.
EPC ratings for properties in Scotland can be found here.
The following buildings do not require an EPC:
- Places of worship
- Listed buildings
- Residential/holiday home accommodation used less than 4 months a year
- Industrial sites/workshops not using a lot of energy
No.3 – Are green mortgages really green?
Well, yes and no. It’s true that there is nothing actually green about the mortgages themselves. The ‘green’ aspect comes from the fact that lenders are encouraging people to move into energy efficient properties and promoting green upgrades to existing properties. As with ‘normal’ mortgages, people will still borrow money and pay it back in monthly instalments. A green mortgage does not mean the lender will be investing this money in environmentally friendly industries. Of course, the greener properties are, the more positive the impact they will have on our planet’s environment.
No.4 – Do green mortgages offer better value?
Again, the answer is a bit of yes and a bit of no.
“The current reality is that there may well be cheaper mortgage options available than the green mortgages being offered. Due to the restricted number of lenders offering green mortgages, independent mortgage advisors can often find a cheaper mortgage that isn’t a green mortgage product. However, lenders offering green mortgages often do so at lower rates than their standard mortgages. As such, a full review of the mortgage options available in the market must be completed, rather than limiting the search to a comparison between green mortgage products.”
Of course, energy-efficient houses will result in lower energy bills – something very attractive in the current climate. While such reductions are important, from a financial point of view, such energy savings will need to be calculated long-term to provide a more accurate indication of how much money has been saved.
No.5 – Are green mortgages here to stay?
Yes. However, it’s perhaps more accurate to say that instead of more green mortgages appearing, traditional mortgages will likely become greener. Demand for energy-efficient homes is only going to increase, as will laws governing such environmental issues.
One clear indication of this is the recent change to the Minimum Energy Efficiency Standards (MEES) for rental properties in England and Wales. Coming into effect in 2025, the new standards call for new rental properties to have an EPC rating of C or above. As of 2028, this rule will apply to all rental properties. Reflecting the importance the government is placing on this, penalties for landlords without a valid EPC will rise from £5,000 to £30,000 from 2025.
The United Nations Climate Change Conference COP26 took place in Glasgow in November 2021. A key goal of the conference was to achieve global net zero admissions by the mid-century. As such, countries are being asked to put forward plans to achieve ambitious reduction targets by 2030. Pressure to build greener homes in the UK is likely to grow as part of plans to achieve these targets, which in turn should lead to growing interest and further product development in the green mortgage market.
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