Everything you need to know about ‘green’ mortgages

Last month, the government announced a new Green Finance Strategy designed to encourage households to make their homes more energy efficient.

Part of this strategy includes promoting the use of ‘green mortgages’ and a £5 million fund has been announced to help consumers looking for a ‘green mortgage’.

But what is a green mortgage? How do they work? And what are the benefits?

What are green mortgages?

Green mortgages are specialist products that provide discounted rates to borrowers who live in energy efficient homes, or who want to make their properties more energy efficient.

Currently, UK homes are responsible for around 15% of the UK’s carbon emissions. The government has committed to reaching a net zero carbon economy by 2050 and so, by improving the efficiency of 17 million homes across the country, the government hopes to make a significant contribution to reaching the 2050 target.

Launching the new £5 million fund, Chris Skidmore, the Energy and Clean Growth Minister, emphasised that homes in the UK needed to be modernised if the government was going to meet its carbon targets.

He said: “To fulfil our world-leading commitment to reach net zero emissions by 2050, we need an overhaul of our housing stock to tackle the disproportionate amount of carbon emissions from buildings.

“By rolling out more green mortgages and reducing the costs of retrofitting older homes, we’re encouraging homeowners to improve the efficiency of their homes and save money on their energy bills, helping to ensure everyone has access to a warm and comfortable home.”

How a green mortgage works

Barclays was the first UK lender to launch a green mortgage back in 2018 and is the only major bank to offer any sort of green mortgage. However, other niche providers also offer these products.

The Barclays scheme is restricted to borrowers looking to buy a new-build property from a list of approved developers/house builders.

Craig Calder, Director of Mortgages at Barclays, explains: “Essentially, this [a green mortgage] rewards homebuyers who choose to buy an A or B EPC Energy Efficiency Rated new build home with lower interest rates on their mortgage.

“Home movers purchasing a new build property could achieve savings of up to £375 – on a typical mortgage of £150,000 over the five-year fixed rate term – with further savings achieved through reduced bills associated with an energy efficient new build home.”

The reason that a lender can offer lower interest rates on green mortgages is based on analysis from the Bank of England which has found that homeowners living in energy efficient properties are less likely to be in payment arrears. This is because energy efficient homes are likely to have lower energy bills, boosting the homeowner’s disposable income.

Energy performance ratings, borrower income and mortgage arrears of 1.8 million properties were studied by Benjamin Guin and Perttu Korhonen from the central bank. The data outlined that around 1.14% of energy-inefficient homes are in mortgage payment arrears, compared with 0.93% of energy-efficient properties.

When considering a number of variables, the findings concluded that the ‘energy efficiency of a property is a relevant predictor of mortgage risk’.

Why green mortgages might not work for older homes or Buy to Let

At present, green mortgages are typically only available if you are buying an energy efficient new build home, and then only from approved house builders.

However, criticism of the initiative focuses on the fact that green mortgages do nothing to support the retrofitting of older homes – the main cause of carbon emissions in the UK. Government figures show that 94% of new homes are rated A to C, compared to just 39% of existing stock.

In addition, the initiative is unlikely to help landlords and investors taking out Buy to Let mortgages.

Last year, the London School of Economics published a commentary that highlighted how the size of the UK’s Buy to Let industry meant that green mortgages might not take off as planned.

The report said: “Landlords do not benefit directly from reduced energy bills from energy efficiency measures – the tenants do. So, the link between reduced bills and reduced mortgage defaults is less clear for landlords and buy-to-let mortgagors.”

Get in touch

Are you thinking of a buying a new build property and wondering if you could benefit from a green mortgage? Get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.