Why a green home should get you a bigger mortgage

New research has suggested that homebuyers could take out bigger mortgages on ‘green’ homes if the energy ratings of properties were taken into account.

The government-funded study has found that while the efficiency of a home is not considered in affordability calculations by lenders, including it could help people borrow more on eco-friendly houses.

Well-insulated homes could fetch a modest price premium

At present, estate agents are required to disclose a property’s energy performance certificate (EPC) when it is listed for sale or rent. However, few buying decisions are currently based on a home’s energy rating.

Now, analysis by the Nationwide Building Society, Arup and building groups has suggested that if the energy rating from an EPC were to be taken into account, it could allow people to borrow £4,000 in many cases, and up to £11,500 in extreme ones.

The research argues that even if borrowers did not take the extra money, the higher limits would attract a ‘perception of value’ meaning well-insulated homes could sell more quickly and command a price premium.

The Guardian reports that “the idea is the latest in a string of mooted incentives to encourage people to insulate their homes and nudge buyers towards greener properties, such as a discount on stamp duty for energy-efficient homes”.

Richard Twinn, a policy adviser at the UK Green Building Council, says: “This new research shows that if lenders use information about a property’s energy performance when making lending decisions, this could encourage homebuyers to choose more efficient homes by increasing the size of mortgage available for these properties.”

Lenders urged to take EPC into account in affordability calculations

Most mortgage lenders today use Office for National Statistics data on energy bills, based on a smaller dataset of properties. Some also obtain data from customers on their actual spending on gas and electricity. However, the figures do not necessarily reflect the energy efficiency of the property being purchased and so, as the report notes, “past fuel bills may well not represent future fuel bills”.

The report by the Lenders group examined data from about 40,000 properties. They modelled how much different EPCs would free up expenditure on energy for a bigger mortgage instead and said that because energy bills were a sizeable part of borrowers’ essential expenditure, it was a part of a mortgage lender’s affordability calculation that warranted being made more sophisticated.

The analysis found that the difference between an A- and G-rated home would be as much as £11,500 in extra borrowing, falling to about £4,000 extra on a mortgage offer between an E- and C-rated property.

However, it admitted that incorporating the changes would not be straightforward due to the complexity of lenders’ systems.