We’ve had a number of customers recently who’s lenders have asked them to update their EPC as part of the mortgage process. From landlords who needed an E band to one commercial client who needed a C band. We’re seeing lenders take this a step further. Some are offering discounted interest rates or cashback through their green mortgages. What are they and can you take advantage when you are buying or refinancing your home?
Table of Contents
- Why Are Lenders Introducing Green Mortgages
- What Are Green Mortgages
- Energy Efficient Upgrades: What Qualifies?
- Is A Green Mortgage Worth It?
- Green Mortgage: What It Isn’t
Why Are Lenders Introducing Green Mortgages
First lets look at why banks are able to offer discounts to green homeowners. The idea is that these energy efficient homes will cost less to run and the borrowers will have more disposable income. This makes the decision to lend to them less risky as they are less likely to default. They also have decarbonisation targets to hit. UK homes account for 20% of the countries green house gas emissions and there are 9 million mortgages. By setting decarbonisation targets for lenders, real progress can be made towards the goal of net zero by 2050.
A property with a higher EPC score is also future proofed against any regulation tightening. Pressure is currently being applied to landlords to try to improve the energy efficiency of the UK’s rental stock. Under current rules, landlord’s need to make sure that their properties achieve a Band E, but this will likely be changed to a Band C over the next few years.
What Are Green Mortgages?
Lenders are offering Green Mortgages to incentivise customers to either purchase a ‘green property’ or carry out energy efficiency upgrades to a property. The common measurement of a green property is determined by most lenders as either a Band A or Band B on the EPC.
How do Green Mortgages work? Lenders are incentivising borrowers in two ways. The first is via a reduced rate for already efficient homes. Most of the products apply to all homes, but some lenders are restricting this to brand new homes purchased directly from the developer.
The second type of green mortgage is to reward people for upgrading the energy efficiency of their home. Lenders are doing this by either offering a reduced interest rate or by offering cash back on completion of the work and an updated Energy Performance Certificate.
Energy Efficiency Upgrades: What Qualifies?
An energy efficiency upgrade is anything that increases the score of an EPC. A couple of examples are
- Replacing single glazed windows with double glazing
- Installing cavity wall insulation
- Adding solar panels
Be careful with Air Source Heat Pumps. Although they are around four times more efficient than gas boilers, the EPC scoring system is strongly linked to cost, not CO2. With gas costing around 4 times less than electric, lived experience in the field is currently showing that ASHPs do not make a positive difference to EPC scores. We’re seeing some homes EPC scores reduce after an ASHP installation.
Is A Green Mortgage Worth It?
This is not our area of expertise. Make sure you fully research the pros and cons of this type of mortgage. A quick google search will show you the current interest rates for comparison between Green Mortgages and Traditional ones. At the time of writing (January 2024), a Green Mortgage was not always the cheapest way of financing a home.
Green Mortgage: What It Isn’t
This type of green borrowing is not the same as an ethical type of mortgage. The profit from the interest is invested by the lender as its regular profits are. There are a couple of specialist lenders that do offer this kind of borrowing where the profits are invested into green initiatives, but the high street banks do not.