Since August at least six mortgage and second charge lenders have launched deals badged as green. The deals either reward borrowers who already own energy efficient homes with discounted mortgage rates or seek to enhance the amount of money homeowners can borrow.
Mortgage professionals have criticised lenders’ attempts at going green which are also failing to incentivise homeowners to upgrade inefficient homes.
The green mortgage deals currently available offer cheaper mortgages to borrowers who own homes that already have an Energy Performance Certificate (EPC) rating of A,B or C.
The EPC scale runs from A which is the most energy efficient to G which is the least.
Landlords have been told by the government that they have to improve the energy efficiency of their properties to EPC C by 2025 for new tenancies and 2028 for existing ones.
While homeowners are not subject to the same requirements, the public is being urged to consider the efficiency of heating to reduce carbon footprints. By 2050, the UK government is aiming to achieve net zero greenhouse gas emissions. According to government statistics, 15 per cent of net greenhouse gas emissions come from the housing market.
Yet currently, Nationwide is the only lender offering a further advance with preferential rates to homeowners who want to improve the efficiency of their home.
According to a study by the building society, it costs on average £8,100 to make energy efficiency improvements to a home. For a property with an energy efficiency rating of F or G, the cost rises to £25,800.
Paul Elliott, managing director of specialist finance comparison site Propp, believes green mortgage innovation can be improved if the government gave lenders access to cheaper funds that they could loan to borrowers to upgrade inefficient homes.
Elliott, who completed an Open University environmental studies court in September 2019 that focussed on decarbonisation, says a scheme similar to the Funding for Lending initiative could encourage lenders to offer green mortgages aimed at owners of properties with an EPC rating of D or less. Cash from banks and the private sector would also be needed to support the scheme, he added.
“We should be trying to encourage landlords to improve their housing stock or Mrs Miggins to reduce the cost of her energy bills,” he said.
He added: “I think an initiative like the Funding for Lending Scheme would work. A government-backed scheme or something similar whereby money can be lent cheaply to borrowers improving their homes.
“This could come in the form of a secured loan or a residential further advance.
“Lenders could ask borrowers to provide quotes for the work they plan to carry out on their home and ask them to explain how this is expected to improve their current EPC rating and to what level. An advance would be offered on a preferential rate on the basis that after the work was done the improved EPC rating had been reached.
“Borrowers should be given a fixed amount of time to prove the work has been done and that it led to the improved EPC rating by providing a new certificate. If not the preferential rate is removed.”
Elliott said he understood that implementing such a system was “not straightforward” as lenders would need to chase borrowers for updated EPC certificates after the work had been completed. If a C target had not been achieved the lender would have to alter the rate and rebill payments as if the energy efficiency rating had not been achieved.
Irrespective of the challenges, Elliott says lenders must act quickly.
“The longer this stays on the periphery of lenders’, landlords’ and homeowners’ thinking, the longer it will take to fix and there’s a lot to be done before 2050.”
Long way to go
Danny Belton, head of lender relations for Legal & General Mortgage Club, agreed that so far lenders’ green mortgage solutions had yet to hit the mark.
Speaking on a webinar hosted by Kensington Mortgages, Belton said: “The early entrants [to green mortgages] have spent a lot of time dabbling in the new build market which for me isn’t the right place to start because these properties are becoming more energy efficient every day.
“There’s a huge second hand market with existing stock that needs to be changed. The products that create the right incentive aren’t available as yet. That’s where we need a lot more help, support and consumer awareness that [homeowners] can make significant changes to their properties […] to concur with the agenda the government has imposed on us.”
Belton added: “We’ve got a long way to go as a lending community to come up with the right solutions.”
The Green Finance Institute released a guidebook for lenders at the beginning of October to offer guidance on green funding and lending solutions.
The book contains information about technology, costs, carbon savings and benefits, along with funding options, guarantees and the quality assurances available.
In a report published by the Financial Conduct Authority, Climate Change Adaption, the watchdog noted that while lenders were taking into account climate-related risks when feeding through into their credit risk functions, it added “banks need to be taking a strategic and organisation-wide approach to climate change, including both their mortgage and financing activities”.
Commenting on the report, Nikhil Rathi, chief executive of the FCA, said: “…we are developing a strategy for how the FCA will push industry, using all our regulatory tools, to ensure we can meet the climate change challenge.”
A spokesperson for UK Finance said: “The investment funding that sits behind the current wave of green mortgages is often aimed at supporting sustainable assets more generally which is why it is being used to fund homes that are already green.
“However, lenders recognise the important role they can play, with increasing numbers starting to consider whether a homeowner or landlord borrowing to carry out energy efficient home improvements makes them a better risk and if some financial incentive can be put in place to encourage that type of borrowing.”