How green mortgages can encourage home energy efficiency improvements

First, let’s clarify what a green mortgage isn’t. It isn’t a loan backed by environmentally friendly funds or where some of the profits are invested in sustainability or renewable energy.

The green element of these mortgages ties into helping to improve a home’s energy efficiency rating. There are three broad types of green mortgages:

• Cheaper lending rates for homes with high energy efficiency ratings.
• Capital release to pay for improvements to a home’s energy efficiency through credit, discounted mortgage rates, or cashback on an existing mortgage.
• Additional borrowing made available for home energy efficiency improvements through re-mortgaging or moving to a new home that may benefit from energy efficiency work.

Each type aims to reduce a home’s carbon footprint and help homeowners recoup any investment by saving money on energy bills. A good energy performance certificate (EPC) rating could even help your property’s value increase, as it can be an indicator of lower running costs.

The UK is one of many countries signed up to the Paris Agreement to limit global warming to 1.5°C, and is aiming to reach net zero emissions by 2050, with Scotland aiming for 2045. Decarbonising the country’s housing stock by making it more energy efficient is a vital part of that journey.

As of 2020, the UK has an estimated 27.8 million households, with 23.2 million homes in England, 2.5 million in Scotland, 1.37 million in Wales, and around 776,000 homes in Northern Ireland, according to ONS figures.

Homes in the UK must have an up-to-date EPC when they are rented or sold. Assessed homes get an energy efficiency rating of A to G, with ‘A’ being the most energy efficient and ‘G’ the least. New homes usually have high ‘A’ and ‘B’ ratings while older, historic properties may carry much lower ratings.

The UK Government has set a goal of achieving an EPC rating of ‘C’ for all homes by 2035. However, currently just 3% of the UK’s housing stock has an energy rating of ‘A’ or ‘B’. Some 19 million (68%) are currently below the recommended ‘C’ rating.

The Climate Change Committee (CCC) estimates that £250 billion needs to be invested in UK home upgrades by 2050 to help the country reach net zero emissions. There is plenty of capital around – homeowners and lenders make the UK the most significant mortgage market in Europe, with £233.7 billion loaned in 2016.

Freeing up money for home energy efficiency improvements through green mortgages is a big step on the UK’s path to net zero emissions.

Household spending, which includes energy bills, is part of a lender’s calculation when looking at mortgages. Most lenders factor a standard energy bill as 4.4% of a household’s total expenditure, which can sometimes lead to inaccurate outcomes.

For example, a family of four living in a ‘G’ rated property would be assumed to be spending £200 a month on fuel bills. But that drops to £50 a month if they were living in an ‘A’ rated home.

Green mortgages take EPC ratings into account and their impact on energy expenditure. That means people buying ‘A’ or ‘B’ rated houses may be able to borrow more, because the less that people spend on energy, the more they can spend on mortgage repayments. Studies suggest that improving a home by two EPC efficiency bands could add up to around £4,000 in additional mortgage finance, thanks to monthly savings on fuel bills.

Lenders want to encourage home energy efficiency by offering lower repayment rates, allowing people to borrow money to pay for improvements that bring energy bill savings.

Some discounts apply once the work has been completed, while others insist that a certain percentage of released funds must be spent on energy efficiency measures. Some require that the completed work brings the house to a specific EPC rating.

Research carried out by Energy Saving Trust suggests that most significant home renovations are carried out within the first year of ownership. Looking at a green mortgage that offers lower interest rates or extra capital puts energy efficiency at the forefront of both the lender and buyer’s thinking.

Research suggests that the older the property, the higher its fuel bill, particularly those more than a century old.

Some of the following measures can improve most homes’ EPC ratings. However, like people, all houses are different, so it’s not just a case of putting in double glazing and hoping for the best. We have expert advice about home energy efficiency improvements, which may include insulation, switching to a heat pump or simple behavioural changes.

If you live in Scotland, find out how your home could be more energy efficient using Home Energy Scotland’s Home Energy Check.

In Scotland, only Scottish Government approved organisations can produce EPCs, listed on the Scottish EPC Register. Scottish EPCs have different criteria to the rest of the UK, so take care when comparing Scotland’s ratings. Home Energy Scotland offers advice about home efficiency, grants and more for Scottish householders.

England and Wales use accredited domestic energy assessors to produce EPCs. Check Landmark for the register or explore our home energy efficiency advice. Or if you live in Northern Ireland, visit Landmark for Northern Ireland for EPCs.

You can also check out our handy guide to energy performance certificates.

It’s relatively early days for green mortgages in the UK housing market, but they’re set for exponential growth as people become more aware of their existence and benefits.

Ask your bank or building society about green mortgages. Some of the biggest banks and lenders already offer green finance products, including Barclays, Nationwide, Natwest, Halifax and Santander, among others.

The country’s housing stock requires substantial energy efficiency investment to help the UK reach net zero. Green mortgages to make your home more energy efficient could grow into one of its most substantial branches.