As individuals, we are more aware of the impact we can have on reducing carbon emissions, but one area that isn’t necessarily as prominent is the effect housing has on the environment and the option of a green mortgage.
What’s it all about?
According to government figures, UK housing is responsible for a quarter of the nation’s carbon emissions yet over a third of UK households haven’t adapted the way they use energy over recent years.
So, environmentally friendly mortgage products make sense. A green mortgage is one that offers preferential terms if the property meets certain environment standards, typically an energy performance certificate (EPC), otherwise known as an EPC rating, of A or B, or where the property has been improved and moved to a C rating. The borrower can buy an energy efficient property or develop their existing property to meet the required standard to qualify.
Availability and attitude
Knowledge, awareness and funding are crucial if change is going to take effect. When the Mortgage Advice Bureau surveyed consumers, over two thirds had not heard of a green mortgage, despite the benefits.
Interestingly, 40 per cent said they would not pay more even knowing it would help the environment. Many homeowners also cannot afford to make the changes required to improve the properties EPC rating.
Regarding availability, only around 20 mainstream lenders offer green mortgages, which tend to focus on A and B rated properties, which represents only a fraction of the marketplace. The green products tend to get ‘lost’ amongst the thousands of other mortgage products that exist.
Market landscape
The government is in the process of making a series of recommendations to both lenders and housing developers.
The Bank of England also began climate-related stress testing on UK banks in 2021. Existing borrowers, homeowners and landlords are being encouraged to invest, to make their homes more energy efficient. Analysis by Rightmove in June 2021 found that 59 per cent of the 15 million homes in England and Wales were D-rated or below.
Over half of the 15 million homes in England and Wales, which are D-rated or below, could reach a C rating with some investment. For context, only three per cent of the UK mortgage market has an EPC rating of A or B.
The UK Climate Change Committee estimates that £250bn needs to be invested in home upgrades by 2050.
What needs to change
It is clear significant funding needs to be made available for consumers to make energy efficiency improvements to their properties. In 2019, the Conservative government committed over £9bn of investment to retrofitting homes across the UK to improve their energy efficiency.
These funds will target the 15 million homes that are D-rated or below and open up the green mortgage market, driving consumer awareness and interest in these innovative products.
Without government funding, many consumers will not be able to afford to make changes to their properties, which in turn may impact the availability of green mortgages. But given the focus on sustainability, it’s increasingly likely that the growth in this market will be significant.
Financing the transformation of the UK housing market needs to focus on making it easy for existing homeowners to make the alterations required. This will help increase green mortgage options for consumers and importantly reduce carbon emissions through driving behaviours leading to lower carbon emissions in aggregate for the UK housing market.
Green mortgages will likely be an area of growing interest to lenders, brokers and clients over the coming years.
