‘Green mortgages’ have lower interest rates or other preferable terms, which are only available to those buying energy efficient homes or committing to improving the energy efficiency of a home.
In theory, this will encourage buyers, sellers and home builders to be paying more attention to the energy performance of homes and help ensure that our existing housing gets brought up to the standards needed to meet global carbon reduction agreements.
Who offers what
These products are still relatively new and we hope to be seeing more providers starting to explore how they can reduce the climate impact of their investments through green mortgages. Only four of the companies in this guide appear to be offering a green mortgage product:
The Ecology Building Society provides mortgages which promote sustainable housing and communities. This can be for self-build energy-efficient housing, ecological renovation, improvements or conversion, or small-scale and ecological enterprises. It also offers mortgages for boat moorings, woodlands, and shared ownership housing.
Its innovative C-Change scheme offers homeowners discounted mortgage rates for energy-efficient homes that fit the criteria above. There are four levels of discount on a standard variable mortgage ranging from 0.25% to 1.25%.
The level of discount offered depends on the energy standard of the home, so the more energy-efficient the home is, the bigger the saving you can make on your mortgage.
Saffron Building Society offers borrowers a 0.1% interest rate reduction with its new Retro-Fit mortgage if borrowers can show they have made changes that improve the EPC rating by one band to at least an E (so those with a band G will have to improve by two bands).
Nationwide’s Green Additional Borrowing offers a 0.69% reduction off normal interest rates if 50% of the loan is used to make your home more sustainable.
This includes the following measures: “air source heat pump, cavity wall insulation, double glazing/replacement windows, electric car charging point, ground source heat pumps, loft insulation, small scale wind turbine, tanks and pipes insulation”.
They do not appear to require evidence of how much measures improved efficiency. This product is only available if you have your main mortgage with Nationwide.
Barclays Green Home Mortgage offers lower interest rates on mortgages for people buying a new property with band A or B energy rating or above 81. The property has to be bought from one of Barclays' partner house building companies.
While the availability of green mortgages is still fairly limited there are signs that other mortgage lenders are also starting to pay more attention to the Energy Performance Rating of their portfolios.
For example, West Bromwich Building Society stated that it had done “considerable work to understand the environmental impact of our Investment Property subsidiary West Bromwich Homes Limited, with action being taken to ensure the portfolio meets the newly introduced EPC standards”.
NatWest stated “We will support customers in the UK & Republic of Ireland who have mortgages with us to become more energy efficient. Our aim is to have 50% of the mortgages we provide at or above Energy Performance Certificate (EPC) rating C or equivalent by 2030”.
However, it appeared that NatWest’s activities around this were largely focused on sharing energy efficiency advice and links to government funding with its customers rather than providing actual funding.
Is a green mortgage an ethical mortgage?
What is important to remember here is that the ‘green’ in a green mortgage is linked to your actions, not those of your lender. It is the house you are choosing to buy that has the reduced environmental impact.
The profit made on your mortgage by the lender could still end up invested in any number of environmentally harmful activities. For example, Barclays offers a green mortgage but loses marks under Climate Change, Pollution and Toxics, Habitats and Resources and Palm Oil.
A green mortgage does not necessarily equate to an environmentally ethical mortgage.
Unfortunately, reduced interest rates represent much less of an incentive when interest rates are low, and the global pandemic has been causing interest rates to plummet. If you are buying an energy-efficient house at the moment, it will not cost you much more, and in many cases could still cost you less, to get a regular mortgage with a more ethical lender than a green mortgage from a company like Barclays.
The financial argument for offering a green mortgage
Until you have finished paying off your mortgage, your house acts as an assurance on the money you borrowed. If you stop being able to pay your mortgage the lender can repossess the house in order to recuperate costs.
Mortgage lenders therefore rely on the housing they have lent on to maintain its value. The increasing urgency of the climate crisis along with rising energy bills will likely mean energy efficiency will be on the minds of more and more buyers and houses falling short will decrease in value and become harder to sell.
So, if preventing catastrophic climate breakdown isn’t enough of an incentive in and of itself then perhaps the potential financial risk of being left with a portfolio of inefficient housing is enough to get mortgage lenders to act.
While there might not seem too many options available right now, we would expect the green mortgage market to have rapid growth. The more green mortgage offers that become available, the bigger the disparity between the value of a high EPC band house and a low EPC band house. This will hopefully encourage mortgage lenders to offer more products to people who already own inefficient housing to help them improve their rating.
Lower heating bills should also mean people find mortgage payments more affordable. On the other hand, considering how we got into this situation, it does not seem wise to rely too heavily on the market economy for climate solutions.
Any actions by mortgage lenders need to be backed up by government regulation for new builds, and government funding for improving existing housing – particularly to support people on a low-income to ensure they do not bear the brunt of low EPC band devaluation.