TSLE: Green mortgage products ‘need to go further’ – GFI

Harvey-Smith said that there are currently around 50 green mortgage products on the market with most offering cashback or discounted rate for energy efficient property.

She added that the GFI was working with lenders to develop more “advanced products” that would help people to improve their home rather than reward an already energy efficient property, such as further advances.

She warned that supporting people in improving their homes was a challenge as there was a “lot of verification required”.

“I think the green mortgages we have seen to date are lenders testing the water and getting used to quite a new concept. You’re not just verifying financial details, but you’re having to find a way to verify that a home is improved, when that might not be captured by the EPC rating,” she noted.

She said that products upgrading properties would require “further touchpoints” with the customer after funds have been releases, which is a “change” from other lender transactions.

Harvey-Smith said that green mortgage that align the GFI’s green home finance principles are “channelling capital towards green outcomes, which is exactly what green finance is”.

However, she said that market “does need to go further” and support improvements in properties and that a “change” in mindset was needed around incentives offered.

“Sometimes the few basis point [discounts] that are offered on green mortgages is lampooned to a degree. I think my biggest question is, is a few basis points going to drive behaviour amongst consumers, or is it something else we should look at?”

She suggest integrating financial solutions into a retrofit scheme so it becomes a “one-stop shop” and “incredibly easy” for the customer.

Harvey-Smith said that she pointed to unsecured lending market which offered fast and easy access to money “where it’s six clicks and bam, the money’s in your account”.

“I think there’s maybe a bit of a bit of soul searching to be done by the industry on whether reducing interest rates is what is actually needed.”

Property Linked Finance model could bolster home improvements

Harvey-Smith said that one of the “biggest barriers” to people undertaking energy efficient improvement was the “long repayment periods” for energy efficiency measures. For instance, 15 to 20 years for wall insultation.

Therefore, borrowers only planning on living in a house for two or three years won’t see the “economic benefit” of energy savings to cover the cost originally invested.

However, with Property Linked Finance (PLF) is a loan that is linked to the property rather than the owner and repayment obligations are transferred to the new owner when a property is sold. This means whoever is living in that property benefits from the energy efficiency measures and lower bills and is the one that pays the bills, Harvey-Smith explained.

She said that the US had a PLF programme called Pace and it had mobilised $10bn towards energy efficiency measures across several states.

“It’s got traction and it’s one of the fastest-growing sub segments of the US lending market,” added Harvey-Smith.

She said that there was a “challenge” at the start when Pace was launched with examples of misselling, which had led to a tightening of the advisory process and customer journey.

“We’ve got a brilliant opportunity with all of these different solutions that are coming to market to try and help customers and if we can try and learn and collaborate with international organisations who have done this, have the scars but then also have the lessons to share, hopefully we’ll develop a solution that can really work for customers in the UK,” she said.

Energy efficient properties will ‘retain’ value

Harvey-Smith said that figures from Moneysupermarket found that properties with an Energy Performance Certificate (EPC) of A could get a 40 per cent premium when being sold on.

However, this was not equal across the UK, with the London and South West regions not having any difference in valuation due to higher EPC rating.

“I would say one of the prevailing views at the moment is that a more energy efficient and climate resilient home is more likely to retain value rather than necessarily having a value uplift.”

She added that government consultation on getting mortgage lenders to disclose the energy efficiency of properties they’ve lent on could widen a valuation difference.

“Lenders not lending on properties below an EPC C is a bad move. We do think there may be disclosures that require lenders to talk about how much funding they’ve provided to improve a property. So again, if we see some of these disclosure rules coming in that could again drive value differentials in properties.”

The Specialist Lending Event continues next week with events in Wetherby and Bolton. If you are interested in attending follow this link. 

The views of the panel members do not necessarily reflect the views of the individual’s company.