Green mortgages could offer bigger loans to energy-efficient homes

Posted 5 August 2016

A new initiative hopes to link the reduced running costs of an energy-efficient home to applicants' monthly affordability when getting a mortgage...

A new project is hoping that energy efficient properties could lead to changes in the way lenders agree home loans, ushering in a new era of 'green mortgages'.

The 'LENDERS' project brings together the Energy Saving Trust, BRE, the Nationwide Building Society and other big names from the building and finance sectors. Their aim is to prove that if the energy expenditure of a home can be more accurately estimated, then a borrower's ability to afford their mortgage repayments can be more carefully assessed.

Buying low-energy homes could mean you will get a bigger mortgage

The idea of the 'LENDERS' project is simple. By replacing broad estimated of energy costs with more accurate ones, banks and building societies can more accurately determine the amount of mortgage a borrower is able to afford. Since more energy-efficient homes have lower bills, customers in low energy houses ought to be able to afford larger mortgage repayments.

Andy Sutton, associate director of BRE Wales, says: "There are lots of interesting ideas around at the moment. A study in the States suggested that low-energy homes have a lower risk of default. There's also been the suggestion that estate agents and surveyors should be valuing energy-efficient homes more highly. These are interesting propositions, but are separate issues.

"The LENDERS project is setting out to prove that mortgage lending can be done with more accuracy. Calculations are currently taking a very broad guess at energy costs, but it shouldn't and doesn't have to be this way.” 

As a mortgage customer, the idea of the project is that if you buy a low-energy home, you are likely to be offered a larger maximum mortgage. The project also has ideas around encouraging mortgage products aimed at buying high-energy homes and improving them, with retention conditions on a proportion of the mortgage similar to those commonplace now for items such as cavity wall tie replacement or electrical rewiring.

Duncan McCombie, operations director of the Energy Saving Trust, said: "We make short-term financial decisions every day, but mortgages are a much longer-term consideration, so a perfect time to engage customers.

"This could mean buying a more energy-efficient property in the first place, or if the buyer has to compromise on that for many possible reasons, taking a B or C-rated property and making some additional energy-efficiency interventions.”

Lenders face a number of challenges to implement 'green' mortgages

Nationwide are the financial figureheads of the project and Andrew Baddeley-Chappell, head of policy and governance for Mortgages and Savings, explained what the key challenges are likely to look like:

“There are three key tests to pass. Firstly, can we show a strong enough correlation? Second, does that make a big enough difference in enough properties? Finally, can these changes be incorporated into mortgage and housebuying journeys?

"In practice, making changes to lenders systems is possible, but the change will involve cost and time. Also, the process cannot work if the borrower only finds out if they can afford their dream property after they've found it. So we need to work out how this will interact with the process of finding a property, as well as getting the final mortgage.

“We have certainly seen interest from other lenders, and there is an increasing recognition of the part that the financial services industry can play in supporting investment in energy efficiency. To deliver its full benefit the approach needs to be adopted market-wide."

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