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Borrowers in energy efficient homes less likely to fall into arrears – BoE

  • 03/02/2020
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Borrowers in energy efficient homes less likely to fall into arrears – BoE
Mortgages taken out against energy efficient properties fall into payment arrears less often than energy inefficient homes, a working paper published by the Bank of England (BoE) has found.


BoE examined 1.8 million outstanding mortgages in the UK at the end of 2017 and compared factors such as a borrower’s age, joint or multiple income, loan to value (LTV) differences and the size and age of a property. 

It also compared the differences in lending and energy performance certificate (EPC) standards, as well as regional variances and the income of the borrower. 

The bank obtained data from the Ministry of Housing, Communities & Local Government to look at all the EPCs issued since August 2008 and found that 23 per cent of all properties were of high energy efficiency – EPC ratings of A, B or C – 49 per cent were of medium energy efficiency – EPC rating of D – and 29 per cent were of low energy efficiency with ratings E, F or G. 

It found that one per cent of properties were in mortgage arrears that year, while the average age of a borrower at the time of a mortgage application was 37, the average income was £55,000 and the average LTV was 81 per cent. 

BoE found that 0.93 per cent of residential mortgages against highly energy efficient properties were in arrears, compared to one per cent of medium energy efficient properties and 1.14 per cent of low energy efficient properties. 

As for the total share of mortgages in arrears, there were seven per cent fewer high energy efficient property borrowers falling behind in payments compared to those in medium energy efficient homes. Furthermore, there were 18 per cent fewer medium energy efficient homes in arrears compared to low energy efficient properties. 



When in came to a borrower’s income, BoE found the difference in arrears against energy efficient properties compared to mortgages against energy inefficient properties was “qualitatively similar”, and concluded salary did not explain why borrowers fell into arrears in energy inefficient homes. 

When looking at property variables, the paper found characteristics such as whether a property was newly built and its number of rooms had some impact on a borrower falling behind on mortgage payments.  

BoE also found that while it had a small impact, the changes in EPC standards over time did not fully explain the correlation between energy efficiency and mortgages arrears. 

Overall, BoE concluded that income did not explain the differences in payment arrears against energy efficient properties while the dates of mortgage origination and EPC inspection did account for some of the disparity. 


Need for consideration 

BoE said its findings did not suggest a “causal relationship” between higher energy efficiency and lower mortgage payment arrears.

It said this was because it did not control for other factors such as a borrower’s financial literacy, risky mortgage contracts or overall risk aversion which may determine whether someone would choose an energy efficient property or not. 

The report said: “Further research is needed to examine the exact channel of the relationship. However, our result might become relevant for credit risk modeling done by lenders. 

“Energy efficiency is typically not considered in most probability of default models for residential mortgage exposures. Hence, our results suggest that the energy efficiency of a property could be factor in probability of default models. In addition, it might become a relevant factor for risk-adjusted pricing of mortgages.” 

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