What net zero could mean for your loan
The UK has set itself the ambitious goal of being a net zero carbon economy by 2050 – and our homes are now at the center of this debate.
The degree to which a property is greened will become increasingly important as we move towards a net zero society, and green mortgages will have a key role to play in that journey.
How might ‘net zero’ affect mortgage lending in the UK?
Achieving this ambitious climate goal will require a drastic reduction in carbon emissions from our homes.
In an effort to curb emissions, some lenders are starting to offer green mortgages with incentives such as lower interest rates for less expensive buildings.
Banking sector body UK Finance said: “Working with the government and the Bank of England, lenders are supporting the transition to a low carbon economy. “
How do green mortgages work?
A green mortgage gives a borrower an incentive to either buy a green property or to do work on an existing property to make it greener.
This is usually a good interest rate, cash back, or an increase in the loan amount.
Which lenders offer green mortgages?
A handful of traditional lenders are already rolling out this type of home loan, including Barclays, NatWest, Nationwide, and most recently Virgin Money.
The figures suggest that there are currently around 27 green mortgage deals available.
Could having a “green” house make borrowing less expensive?
For the most part, having an energy efficient home today only means a small rate saving – allowing you to lower your mortgage payments a bit.
Barclays, for example, offers a line of new property products that have an Energy Performance Certificate (EPC) with a rating of A or B. An EPC assesses the energy efficiency of a property with a rating between A ( highest) and G (lowest).
Andrew Montlake, independent broker Coreco, said: “Barclays just launched a rate of 1.97% on a two-year fixed rate at 80% loan-to-value (LTV) at no charge. It’s the best no-cost option on the market and compares to a rate of 1.99% on a standard product with Progressive Building Society.
NatWest’s line of green mortgages offer preferential rates on select products to clients who purchase a property with an EPC rating of A or B.
Virgin Money has just launched its “Greener Mortgages” line, allowing customers who buy new, greener properties to access a range of products at a price 0.1% lower than equivalent products.
Elsewhere, Nationwide is offering up to £ 500 cash back for energy efficient homeowners.
Montlake added, “If you own an energy efficient property, it is worth exploring green mortgages. That said, in many cases, you will still be able to get a better rate elsewhere on a standard product.
It is wise to compare the entire market before signing any particular agreement.
Sam Harhat, Andrews Mortgage Services, said: “It is important to look at the entire mortgage product, including the LTV, fees and associated costs over the life of the mortgage.
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Will more lenders follow suit?
Recent research from the Intermediary of Mortgage Lenders Association (IMLA) found that 57% of lenders plan to launch a green mortgage option after the pandemic.
But some experts believe there is still some way to go.
Rachel Springall, Moneyfacts, said: “As green mortgages become more and more desirable, for now they are still rather niche.”
Montlake added, “Green mortgages have a place in our future, but to really work they need to be more than a gimmick – and come with greater savings and benefits.”
What does all of this mean for owners of older homes?
The government has pledged to “rebuild greener” after the pandemic is over. This is great news for those buying a new home with a high EPC score of A or B, as it could mean cheaper borrowing.
But owners of older homes – who tend to have efficiency ratings of D or E – may fear that in the future they will face more expensive mortgages.
Harhat said, “At this time, a house with a poorly rated EPC will not make borrowing more expensive. But if, at the end of the day, lenders see energy efficiency as part of their mortgage evaluation criteria, it might be more difficult to get a mortgage if you live in a house with a bad rating. It could also mean that borrowers cannot remortgage and could be trapped in paying their lender’s higher Standard Variable Rate (SVR). “
Montlake adds that as the UK moves towards its net zero goals as a whole, we might see lenders ultimately targeting loans primarily to energy efficient homes.
“It could mean a two tier loan system where energy efficient homes get the best rates across the board,” he said. “At the moment, this is not the case.”
Can I improve the energy efficiency of my home?
Since some “green mortgage” lenders offer incentives to those who renovate a home to make it more sustainable, this could be another way to lower the cost of borrowing.
For those looking to improve the rating of their home, improvements could include measures such as installing double (or triple) glazing and insulating walls and attics.
The government has said it wants all homes to achieve an EPC Category C rating by 2030.
That said, recent reports suggest that around 1.7 million ‘dirty’ homes in the UK cannot be upgraded to improve their energy efficiency rating above C.
At the same time, the government has also come under fire for its decision to cut the £ 1.5bn grant for green houses. This was designed to help homeowners in England insulate their homes by providing up to £ 5,000 for upgrades, but was closed to further requests at the end of March with no replacement.