The future of green mortgages

19 April, 2021Richard Northedge

Green mortgages reward borrowers with lower interest rates for buying energy-efficient homes. Richard Northedge looks at this new market – including lenders and the level of consumer demand for home loans. And he questions whether its future is sustainable in the long term.

Trees growing on balconiesThe UK has pledged to reach net-zero carbon emissions by 2050. And this year’s spring Budget included green savings bonds, green finance and a sustainability remit for the Bank of England (BoE).

But while politicians make policies, it’s people who implement them. And many of the choices involved are close to home – quite literally.

Green mortgages and energy savings

In principle, ‘green’ mortgages could make buyers more interested in homes with a smaller carbon footprint.

They’re conventional property loans used to buy homes with, typically, an A- or B-grade ‘energy performance certificate (EPC). As an extra incentive, they have a lower mortgage rate.

So, borrowers have both reduced energy bills and cheaper mortgages.

Green mortgage lenders in the UK

In 2018, Barclays became the first high-street lender to launch a green mortgage. NatWest followed last November. Loans usually have a maximum 85% loan-to-value and a rate five or ten basis points below the norm.

Nationwide Building Society has a discounted-rate Green Additional Borrowing Mortgage if the loan mainly finances energy-efficiency improvements. There are also green equity-release loans as the product range grows.

But the definition of ‘green mortgage’ is elastic. Some lenders think a donation to a climate charity is enough to make a mortgage green.

Standardising energy efficient mortgages

The World Green Building Council has been lobbying hard with its UK affiliate.

It launched its ‘Lenders’ project in 2015 alongside Nationwide and several non-profit bodies, but no banks. ‘Lenders’ stands for ‘Levering Economics for New Drivers to Energy Reduction and Sustainability’. The project approach was to take EPC ratings as a measure of greenhouse gas emissions.

A standard approach is important because mortgage lenders use local market rates to assess whether a property offers enough collateral.

Green mortgages need a similarly cheap and widely available benchmark – particularly in a housing market that has many old and varied properties.

A new mortgage market

Last autumn, an Intermediary Mortgage Lenders Association survey found:

  • 43% of consumers had never heard of green loans
  • 43% of brokers were reporting little demand.

But this is a new market.

Green advocates hope owners will one day be as excited about fitting a heat pump as they are a new kitchen. Discounts will attract some, being green will appeal to others.

An Energy Efficient Mortgage logo was launched in February to brand these loans. And NatWest hopes half its mortgage book will be EPC grade C or better by 2030, saying demand is exceeding expectations.

But if green mortgages become the norm, it may not be an enhanced energy-efficient property value that drives demand. It may be the fear of other homes becoming blighted – a brown discount rather than a green premium.

How will lenders react if their existing loan book is secured against properties that are becoming unsaleable? And can they advertise ‘discounted’ green rates once they are the new standard rate?

Homes have become more energy efficient, but progress hasn’t ended. Green campaigners are pushing for full decarbonisation and hydrogen boilers.

And today’s cutting-edge insulation will look inefficient and outdated by the next decade. How green will today’s green mortgages look then?

Green mortgages and the UK housing stock

The UK’s 29 million homes will last many decades – even centuries.

We can’t rely on energy-efficient new homes replacing existing properties that fall into disrepair. Meeting the government’s carbon-neutral target requires upgrading the current stock.

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.

They’re a market-based encouragement for owners to improve energy efficiency. And you don’t have to be green to like lower interest rates.

Richard Northedge 

Richard Northedge is a former Banking Journalist of the Year who was deputy City editor of The Daily Telegraph before spending a decade at a leading investment bank.

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