Upping demand for green mortgages
17 Jul 2019
Declarations of a ‘Climate Emergency’ by governments right across the world – including the UK – and the growing sense of unease about how we tackle climate change, and whether we have reached a tipping point, mean now is an opportune time for the housing and mortgage industry to do its bit.
The recent announcement by the government that it has opened a Green Home Finance Innovation fund to help the industry deliver more green mortgages and other financial products, has certainly shed some considerable light on this area. The £5m pledged is designed to bring more ‘environmentally-friendly’ mortgage loans to market, but how might they work and will they be able to compete in a market which is already incredibly competitive?
Of course, green mortgages already exist and are offered by a number of lenders, working on the basis that the borrower is rewarded for improvements to the energy efficiency of their home when they upgrade their energy rating. That reward comes in the form of rate cuts and this is offered as an incentive to homeowners, but one would suspect these may need to be significant to attract customers and they may only suit those who were intending to carry out such work anyways.
That said, there are large numbers of energy-inefficient homes right across the country and large numbers of borrowers doing little to improve this. We know that the government is keen to improve this, right across the board, because let’s not forget that this isn’t just about cutting the cost of a mortgage but also cutting the cost of energy bills which have tended to only go in one direction – up – for many people in recent years. It begs the question, is now the time to introduce a stick & carrot approach to create the necessary change?
Introducing a mandatory energy rating level for all dwellings across the country – let’s also remember that large numbers are exempt from even requiring an EPC – would go a long way to upping demand for green mortgages. If homeowners, for example, need to reach a certain rating before they are allowed to sell a property, then this might well incentivise borrowers to lean towards green mortgages because there is a further financial incentive to them getting the work done.
Perhaps where there could be the greatest demand for green mortgages though is within the private rental sector, combining green with buy-to-let products. Landlords are required to have an EPC rating of E on their rental properties before they can let them out, and the likelihood is that, in the future, this bar will be raised. Might there be an incentive for buy-to-let lenders to bring in elements of green mortgages to incentivise landlords to get that work completed, in order to reach the standards, and to receive a rate cut as a result?
There’s no doubting that ‘green is good’ will be a mantra used across many product areas in the future, and there’s no reason why the mortgage market can’t get on board with the groundswell of public support, and ensure it does its bit to develop products which fit this.
There is, of course, a major dilemma here in that for the majority of borrowers they are not excluded from the ultra-low mortgage rates we have in today’s market, just because the energy rating of their property is poor. Perhaps we will see this change, with lenders not willing to lend on properties which don’t meet the necessary standards, or only accepting them if they take out a ‘green mortgage’ and commit to improvements.
One senses this type of approach will need government and regulatory action in order to deliver on it but given the importance and the fact we are now in ‘Climate Emergency’ territory, we should not be surprised to see such action taken. Both advisers and lenders might wish to get ahead of the curve here because one senses that the borrower population will be open to these types of products and that, at some point in the future, they will become a mandatory part of our market.
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