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ERC ‘hopes to see innovation’ as it launches retrofit equity release guide to boost green lending, Melville-Kelly says

Samantha Partington
Written By:
Posted:
August 21, 2024
Updated:
August 21, 2024

Later life lenders are poised to develop retrofit deals for borrowers to improve the efficiency of their homes as the Equity Release Council (ERC) launches guidance on design and delivery.

Demand for more energy-efficient homes provides a growth opportunity for the equity release market, which the council acknowledges is “a little behind” in green product design.

It is anticipated, however, that as more retrofit lifetime loans hit the shelves, innovation in product design will gather momentum as funders see the value in backing green products.

 

All eyes on retrofit

Kelly Melville-Kelly (pictured), head of risk, policy and compliance at the council, said: “From a lender point of view, everyone is looking at this market.

“What we’ve tried to do with the guidance is to start putting forward ideas for lenders. The only way we can begin decarbonising our housing stock is to start making home improvements.

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“The biggest gap will be in the older housing stock and a lot of [it] sits in our age category of 55-plus.”

There are already some green equity release deals in the market that reward those who already live in an efficient property, however it is understood that lender Just is looking at developing one of the first retrofit products.

 

Retrofit recommendations

Within the guidance, the council makes several suggestions on retrofit product development that alter the standard customer journey.

Borrowers who want to release equity to make home improvements, some or all of which may be for green home improvements, should undergo a retrofit assessment before any financial advice is offered, the council recommends. The assessor will consider if the home can support retrofitting and what the best energy-efficiency measures for the property are. This extra step is designed to safeguard the customer to ensure they get the best advice on improvements.

Other suggestions include recommending accredited contractors to carry out the work and asking them to provide a certificate of verification to confirm the work has been completed.

The guide also defines good practice to ensure protection for customers as well as providing guidance for advisers.

 

Avoid greenwashing

Melville-Kelly said: “This would be a way to avoid greenwashing. If the customer is getting a better deal because they’re carrying out green home improvements, lenders should make sure the money has been used for its intended purpose.

“The lender can then record that the property’s Energy Performance Certificate (EPC) rating has been elevated from a C to an A, for example, which means it can fully justify calling it a retrofit mortgage and have the offset for the carbon emissions as a result.”

All lenders must report their carbon emissions and retrofit mortgages are one way to reduce that footprint. The ability to use retrofit equity release loans to offset carbon emissions is also attractive to the funders backing them. It is hoped this will lead to more flexible lending terms on those products as funders look to make them more attractive to borrowers.

“That’s where we hope to see innovation in the market, but only if it’s a true retrofit and not if there’s greenwashing,” said Melville-Kelly.

 

Perks of going green

Although products have yet to be designed, the council anticipates lenders will be able to pass on discounted rates, cash back for energy-efficient works and, as a result of a higher valuation post-retrofit, the borrower could qualify for a higher loan to value (LTV) if needed.

Before publishing the guidance, the council consulted with other financial trade bodies, its lender and adviser forum, standards committee and the Green Finance Institute (GFI).

“I have to give big praise to the Green Finance Institute,” said Melville-Kelly. “We’ve worked closely with them and referenced their principles because we don’t want to do something out of sync with the rest of the market.

“The only way we’re going to develop in this market is if we all join together and have the same aims and goals.”

You can find the ERC’s guide in the member area of the website.