A European Energy Efficiency Mortgage initiative is being launched today with the aim of offering better borrowing rates if people buy an energy efficient home.
Banks, property valuers, energy efficiency businesses and utility providers are partnering in the project which is led by the European Mortgage Federation – European Covered Bond Council (EMF-ECBC).
The consortium aims to create a standardised “energy efficient mortgage” based on preferential interest rates for energy efficient homes and/or additional funds for retrofitting homes at the time of purchase.
The project represents the first time a group of major banks and mortgage lenders, as well as businesses and organisations from the building and energy industries have come together to address the concept of energy efficient mortgages.
The project partners are the Ca’Foscari University of Venice, RICS, European Regional Network of Green Building Councils, E.ON, and SAFE Goethe University Frankfurt.
Climate finance
Creating a private bank financing mechanism to encourage the energy efficient improvement of households is a key means of helping the EU to meet its energy saving target of 20% by 2020.
It also aims to help deliver on the ambition of the historic climate change deal, known as the Paris Agreement, which was reached at the 21st session of the Conference of the Parties (COP21) last December.
There is growing global institutional and investor interest in climate finance and private sector investment to fund low carbon initiatives. This will be the main focus of COP22, the next major climate change conference taking place in Marrakech in November
Advantages for lenders and borrowers
The European Energy Efficiency Mortgage initiative will explore the link between energy efficiency and borrower’s reduced probability of default and the increase in value of energy efficient properties.
For banks and investors, this could lead to loans which represent a lower risk on the balance sheet and could therefore qualify for better capital treatment. It could also ensure that banks are able to recognise “energy efficient” assets in their risk profiling, which would begin to help the market to price-in the added value of energy efficient real estate.
The initiative is launched today at the World Green Building Council’s BUILD UPON Leaders’ Summit in Madrid, where 200 renovation leaders are gathering to discuss how to tackle energy efficiency in Europe’s existing buildings.
Luca Bertalot, EMF-ECBC secretary general, said: “We have the responsibility to design a sustainable environment for future generations by developing a pan-European mortgage financing mechanism, according to which energy efficiency investments are made more accessible and affordable for consumers and institutional investors; and the subsequent energy efficiency improvements reduce risk for banks, creating a win-win for all involved”.
Maarten Vermeulen, regional managing director of RICS in Europe, commented: “The impact of sustainability on economic value, investment risk and performance has become a key issue for banks, investors and fund managers.
“Reinforcing the link between the technical performance of a building and its financial performance will not only help to raise awareness about the value of energy efficiency but it will also create multiple incentives to ultimately improve the European building stock.”
EU energy consumption
In the EU, buildings are responsible for 40% of the total energy consumption and 36% of CO2 emissions. By improving the energy efficiency of buildings alone, the EU’s total energy consumption could be reduced by 5-6% and CO2 emissions by 5%.
The building stock within Europe constitutes the largest single energy consumer in the EU and the value of the European mortgage market is equal to 53% of the EU’s GDP. Therefore, there is huge potential to build a bridge between the finance and energy efficiency worlds and unlock the benefits of mortgage financing to support energy efficiency.
Lower default risk
Research in the US shows that borrowers financing energy efficient properties have a 32% lower probability of default on their loan. This is because the energy costs, which represent a large share of the monthly payments by the borrowers, are lower.
Research by the UK Green Building Council also shows that if mortgage lenders included more accurate estimates of energy costs in their lending assessments, the risk of over- or under-lending could be reduce by many thousands of pounds over the life of the mortgage.
