Speaking with Mortgage Solutions, Craig McKinlay, new business director at Kensington Mortgages said he was not a fan of mortgages which gave discounted rates or cashback on already efficient properties as it was “going down the easy path”.
Kensington Mortgages does offer a product targeted to new-build homes with an Energy Performance Certificate (EPC) rating between A and C as McKinlay said it would be “unfair” not to. However, but said he preferred the lender’s other offering which rewards borrowers with £1,000 if they improve their home’s energy efficiency rating during the fixed rate term.
This was launched in 2020 as part of the lender’s response to conversations around climate change following the bushfires in Australia.
“The reason I’m really keen on that is because the customer only gets the money if they do something that improves the climate footprint of their property, which feels like something we should be doing,” McKinlay added.
His concern with mortgages that reward efficient new-build homeowners is that the borrower has not done anything to make the home more sustainable.
McKinlay said this was also pertinent in instances where landlords sell off lower-rated homes to avoid penalties relating to proposed legislation to buy more efficient properties.
“The problem with that is you haven’t fixed the problem; you’ve moved the problem.
“It’s the secondhand housing stock where all the emissions come from. That’s where the challenge is. And that’s what I think lenders, the government, and rating agencies should be focused on.”
Not enough incentives
Danny Belton, head of lender relationships and Legal and General Mortgage Club, said the green agenda had been a topic for years and society was aware that the UK aimed for its economy to become net neutral by 2050.
As for targets imposed on the property market, he said: “There’s no full confirmation yet, and that’s what we as an industry are expecting.”
Belton also said that for the most part, existing mortgage options were “not designed to drive an outcome in terms of improving the existing housing stock of the UK market”.
He said even within the new-build market, where most of the efficient homes were being built, few had an A rating. Belton said this was because profit margins were tighter on A rated homes.
Belton added: “So you could argue the incentive is not quite there for a builder to build too many A rated properties.”
He said there were some options encouraging and rewarding people to improve the energy efficiency of their homes, but this still did not make up a “great deal” of products on the market.
Belton also said homeowners were not quite at the stage of thinking about improving the energy efficiency of their homes because there was little immediacy regarding the savings or targets.
He added: “Once we get certified rules, once we have a better understanding of what it is we’re trying to actually get to, and the mechanisms that are available, lenders will be able to provide products, brokers will be able to talk to their customers more informed. And customers will be able to make better choices.”
New energy efficiency measures?
Belton also said that as well as a lack of confirmation on deadlines, there was always the chance that the standards used to measure efficiency could change.
There have been debates around the effectiveness of an EPC rating when it comes to judging a property’s environmental footprint. He said the emissions a property produces could be a more accurate guide.
As an example, Belton noted that two identical properties may have the same EPC rating, but one could have a smaller carbon footprint depending on the tenant’s energy use.
Belton said energy use could be considered in mortgage affordability tests instead to boost borrowing.
McKinlay said the same, adding that one area he wanted to examine was factoring energy bills into affordability so those who paid less could access more from a lender.
“I don’t think anyone does that yet. But that feels like a sensible place to look,” he said.
McKinlay said while having inefficient homes on a lender’s backbook was a “credit concern”, a scenario where lenders are punished for lending to people with lower ratings needed to be avoided.
He added: “The focus has to be on improving current stock because that’s where the problem is.”
Reporting rules
As well as a disjointed approach to improving energy efficiency, a consultation was opened by the International Accounting Standards Board (IASB) in September last year, where it asked for opinions on the classification and measurement rules in IFRS 9, which assess the credit risks attached to assets.
Some respondents queried whether IFRS 9 reporting rules required loans with ESG-linked features to be measured at fair value through profit or loss or at amortised cost less impairment. This was considered important as fair value accounting is typically associated with a greater volatility in profit or loss.
The IASB is currently considering a standard how these assets are accounted.
Graeme McRitchie, head of prudential risk at Leeds Building Society, said he did not see lower rated homes as a limiting factor from an IFRS 9 perspective at the moment, as there was insufficient evidence of this impacting current house prices.
“However, this is being closely monitored and it may become a more relevant factor over the next few years once the new EPC regulations are finalised and they start to influence the housing market and therefore market valuations, or if the impacts of the cost-of-living crisis intensify further,” he added.
The mortgage sector’s role in sustainable housing
For the most part, it has been up to lenders to create products to encourage the use of sustainable dwellings but last week, the government announced another fund to help with the development of options.
When asked if it was fair for lenders and mortgage advisers to have the responsibility of improving the UK’s housing stock quality, Belton said as residential properties made up 20 per cent of the country’s emissions, the sector had “a role to play”.
He said: “By default, as an industry, we have to be seen to be doing something and trying to do the right thing and help customers.”
However, he said the sector needed to know its place adding: “We need to make sure we don’t become an industry of home improvements people. But we should be helping customers understand the importance of the agenda.”
McKinlay said there were many communities, not just individual houses but regions where inefficient properties were a problem.
“And that doesn’t feel fair when the government’s supposed to be levelling up,” he added.
Mortgage industry takes greener steps
Aside from helping homeowners to make their properties greener, Belton said the sector could become more environmentally friendly in its processes and activities.
He added: “We need to make sure we look at ourselves. We need to make sure we look at our businesses, and how we conduct ourselves.
“We can make small changes now that collectively will make a big difference over time. And I know many businesses and brokerages have already started to make changes as to how they work and the type of cars they drive.”
“Lenders are definitely looking at their own business in order to try and do things such as schemes to offset their carbon emissions, which is great. There’s always more we can do but we’re taking the right step.
“We’re starting to see some brokerages do the same as well. But we all need to be doing things and all just do that little thing in our daily lives, that actually makes a difference,” Belton said.
