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Since the government announced the UK’s commitment to decarbonise all sectors of the UK economy by 2050, the race to align financial services with key environmental objectives has gained momentum. Green Mortgages (also known as eco-mortgages or sustainable mortgages) were designed to encourage and incentivise homeowners to create more energy-efficient homes. They have since become the flagship offering from institutions looking to lead the charge.
The Rationale Behind Green Mortgages
We have around 30 million buildings in the UK, some of which are the oldest in Europe. Unfortunately, this also means they’re costly and inefficient to heat. Wasted energy has become a significant problem.
In the Net Zero Strategy set out by the UK government in 2021, ‘Heat and Buildings’ were highlighted as one of the key areas targeted for reducing carbon emissions. The measures were brought in as an action plan following the Intergovernmental Panel on Climate Change’s (IPCC) Climate Change Report 2022. The report delivered stark news: if the world fails to limit global warming to 1.5°C, we may reach a tipping point and lose control of our climate for good.
"The science could not be clearer: by the middle of this century, the world has to reduce emissions to as close to zero as possible, with the small amount of remaining emissions absorbed through natural carbon sinks like forests, and new technologies like carbon capture. If we can achieve this, global emissions of greenhouse gases will be ‘net zero’"
60% of all UK homes are still rated D or below on Energy Performance Certificates (EPC). It is reported that 21% of the country’s carbon emissions can be attributed to them alone (Energy Saving Trust, 2021). All new homes are built to be as energy efficient as possible, but we also need to improve energy conservation across existing housing stock. Research suggests that if all feasible improvements were made, the UK could achieve energy ratings of A-C across 98% of homes (Net Zero Strategy: Build Back Greener, 2021)
Green Mortgages: The Incentives
To create an opportunity where homeowners can align financial goals with environmental values, lenders now offer mortgages with preferential interest rates and favourable terms for customers who choose to invest in sustainable home improvements. These range from energy-efficient heating and cooling systems to solar panels to insulation upgrades or eco-friendly technologies. Additionally, green mortgages often offer financial rewards and incentives for meeting certain sustainability targets. Homeowners who successfully achieve specified energy efficiency ratings or demonstrate a commitment to sustainable living may qualify for lower mortgage rates, reduced fees, or even cashback rewards. This encourages homeowners to actively engage in sustainable practices, creating a positive feedback loop where both the environment and the borrower benefit.
Moreover, green mortgages recognize the long-term value of energy-efficient homes. By investing in sustainability, homeowners can significantly lower their energy bills over time, making their properties more affordable to maintain and improve their overall financial stability. This appeals not only to environmentally conscious individuals but also to those seeking economic advantages and long-term savings.
Green Mortgages: The Good
Green mortgages are a mark of recognition that long-term strategies are needed for sustainable and energy-efficient homes. These are the benefits the industry is seeing as a result so far:
A rise in conscious homeownership
People are increasingly recognising the importance of sustainable living and are becoming ever more eager to make a positive environmental impact. Some borrowers are actively seeking lenders who offer environmentally friendly financial products. The trend reflects a growing awareness and willingness among homeowners to take proactive steps towards reducing their carbon footprint.
Lenders as catalysts for change
Mortgage lenders have played a pivotal role in driving the success and uptake of green mortgages. Forward-thinking lenders have embraced the potential of sustainable financing and integrated green mortgage options into their portfolios. By offering preferential interest rates, reduced fees, and attractive incentives, these lenders have motivated borrowers to invest in energy-efficient home improvements. This proactive approach has not only attracted environmentally conscious customers but has also positioned lenders as catalysts for change, aligning their business objectives with the pressing need for sustainable development.
Empowering Borrowers
With greener initiatives, lenders empower borrowers to make financial decisions they feel good about. The immediate rewards of making a morally positive and proactive decision about product options creates a sense of aligned values and a tangible benefit. It’s a positive feedback loop that is becoming more popular among discerning homeowners.
Stimulating Energy-Efficient Investments
Since the introduction of green mortgages, there has been a notable surge in energy-efficient investments in residential properties. Homeowners are using the financial advantages provided by green mortgages to fund renewable energy installations, such as solar panels and heat pumps, as well as upgrading insulation and implementing smart energy management systems. These investments not only enhance the energy efficiency of homes but also increase their value and desirability in the real estate market.
Collaborative Partnerships
The products on offer are the result of collaborative efforts between mortgage lenders, companies, and government agencies. Partnerships have been forged to provide comprehensive support to borrowers, including access to energy audits, expert advice, and guidance on available grants and incentives. These collaborative initiatives have further accelerated the uptake of green mortgages and fostered a sense of collective responsibility towards building a more sustainable future.
Green Mortgages: The Not So Good
It’s not enough to have a great idea – what have we seen in terms of change, uptake, and enthusiasm?
Greenwashing
The temptation for firms is to claim they are implementing strategies to meet decarbonisation targets, while failing to put feasible plans in place may result in consequences from the FCA. Anything promoted as ‘socially responsible’ or ‘green’ or ‘ethical’, must be able to demonstrate that it is. For example, offering lending options on energy-efficient new-builds only looks good on paper, but it doesn’t solve the problem of existing housing stock. Lenders are expected to find ways of older, less-efficient buildings attractive for consumers by offering incentives on a range of improvements.
Vague Definitions
“One of the problems is there is no consensus across the lenders in regard to what constitutes a green home,” writes Gemma Harle, Managing Director of Quilter Financial Planning for Green Mortgages 2023. “Therefore, some homes will qualify for a Green Mortgage and some won’t, which doesn’t make it a level playing field and can cause confusion for consumers.”
Good, but not good enough
There are currently around 533 Green Mortgage products available in the UK, but critics of the scheme say the deals are not yet competitive enough to make people pay attention. In 2020, two years into the scheme, the Intermediary Mortgage Lenders Association found that 43% of consumers had never heard of Green Mortgages and that 43% of brokers were reporting very little demand for them. Although we are starting to see some enthusiasm in 2023, it feels like more could be done to excite consumers and see a greater shift towards sustainable homeowning.
Unintended Consequences
Although launched with good intent, some have voiced concerns over the ways in which greener initiatives could end up putting those who aren’t eligible at a disadvantage. “I wonder at which point BTL lenders will stop offering better rates on greener properties,” says L&C Director David Holliingworth, “and start penalising borrowers by refusing to lend on properties that don’t have an A-C rating.” Also flagged up by the FCA, was the efficacy of asking people to commit thousands of pounds to home improvements when they’ve just bought a house – a time where most have sunk their entire life-savings into the process itself. To address this issue, some lenders are now starting to offer these incentives at any point throughout the mortgage lifetime, easing the pressure on consumers.
Everyone from policy-makers to consumers have a part to play in the reaching the UK’s net zero target by 2050. A focus on delivering real-value offerings that excite and encourage people to take the initiatives is needed to drive the scheme forward.
“The UK is going green, even if political ideals are ahead of public enthusiasm. That momentum should drive the demand for, and supply of, green mortgages.”
The main priority for lenders offering Green Mortgages should be ensuring customers are fully informed, supported and empowered. With Consumer Duty in mind, the FCA has set out numerous benchmarks to guide product offerings and outcomes:
- Do your customers understand the product?
- Do they understand any trade-offs being made?
- How are customers being supported throughout the lifetime of the product?
- Will that support meet their needs?
- Is there full visibility on the customer journey and opportunity to act if needed?
