Anyone who attended the LIBF Mortgage Conference this year will have had the opportunity to hear David Geale, Director of Retail Banking for the FCA, give a speech on the regulator’s view of green mortgages. This included where such products will fit in relation to Consumer Duty.
What is a green mortgage?
Essentially, a green mortgage is one where the lender provides some form of financial incentive to the borrower for either purchasing a more energy efficient home or increasing the efficiency of an existing property.
Why are green mortgages a thing?
The UK housing stock is comprised of some of the oldest and least energy efficient properties in Europe, with only 40% currently holding an EPC rating of A-C. However, with the right interventions, most of the remaining stock can be brought up to standard. What’s more, in addition to improving the energy efficiency of properties and reducing fuel bills, green-focused improvements can have significant impact on the decarbonisation of our homes.
While some of the required improvements require considerable investment by the homeowner, in November 2022, the Climate Change Committee reported that “over 60% of households can achieve levels of energy efficiency that are compatible with net zero for less than £1,100.”
However, many homeowners would still need financial support to meet these costs. This provides huge opportunities for lenders to support their borrowers, whilst also contributing to their own net zero targets.
So, how does Consumer Duty impact green mortgages?
At the very heart of the Consumer Duty is an overriding requirement for all parties “to deliver good outcomes to retail customers”. This applies to the development and marketing of products and services, the pricing and value of products and services, consumer understanding and consumer support.
From a product perspective, this means that there must be a clear target audience for whom the product is developed for and marketed to. Whilst green mortgages will provide benefits to many borrowers, they will not be appropriate for all. For example:
- a property may already have the highest levels of energy efficiency
- some properties may be unsuitable for the upgrades being suggested
- there may be other products which offer similar benefits without being linked to specific home improvements.
This means that providers who develop these products need to be explicit about the type of customer who should consider them, and how such customers will benefit from them.
What about the role of the mortgage adviser?
The role of the adviser is fundamental in ensuring that the four Consumer Duty outcomes are all achieved. However, as an adviser your greatest responsibilities lie in identifying the most suitable product for your customer, helping them understand that product, and being able to evidence these two things.
To do this effectively when it comes to green mortgages, there are several additional areas where you must have a clear understanding of your customers’ objectives and priorities.
Equally, you must ensure that the customer has a very clear understanding of their obligations when choosing a green mortgage product.
- If there are certain things that must be done to the property, within set timescales, does the customer fully understand these?
- What are the implications, or penalties, if these conditions are not met?
- What if the required changes to the property are not cost effective?
- Is the customer looking to minimise their ongoing energy costs or is it a priority to gain maximum value for money from any improvements they make?
For example, a green mortgage may offer the lowest interest rate of a type that is suitable for your customer. However, this may be on the condition that a particular improvement is made. The savings in energy costs may also mean that it takes 10 years to recover the initial costs.
As a mortgage adviser, it isn’t your role to identify how long it takes to recover initial costs, but it is your role to make sure that you are recommending the right product, based on the research your customer has already done, in line with their financial objectives. Where their financial objectives appear to conflict, it is your duty to identify their priorities before making a recommendation.
Related content
Read more about our mortgage advice qualifications