The Financial Conduct Authority (FCA) has reaffirmed its commitment to helping borrowers to improve the energy efficiency of their homes through green home finance.
In essence, said the FCA, a green mortgage refers to a mortgage which includes an incentive for people to either purchase an energy-efficient property, or improve the energy efficiency of an existing property. The incentives may include a discount to the fixed rate or cashback following completion of the improvement.
Speaking at the London Institute of Banking and Finance Mortgage Conference, David Geale, Director of Retail Banking at the FCA, said the regulator “[wants] to see mortgage lenders delivering on their net zero pledges, and consumers benefitting from homes with enhanced energy efficiency […] And we, as the regulator, will do what we can to support and encourage the industry in this relatively new, and rapidly evolving space”.
Geale said the UK has “some of the oldest and leakiest housing stock in western Europe”, describing the decarbonisation of said stock as a “systemic issue”:
“It cannot be solved by any single actor alone, and every part of the housing value chain has a role to play.”
He did, however, point out the Climate Change Committee’s recent suggestion that “over 60% of households can achieve levels of energy efficiency that are compatible with Net Zero for less than £1,100”:
“So the opportunity is huge – but homeowners need help freeing up the funds to make their homes warmer, and their bills lower.”
On how green home finance could form part of the answer, Geale said:
“Green mortgages can help the decarbonisation of residential homes in the UK, which account for around a fifth of the country’s greenhouse gas emissions. And with over nine million regulated mortgages in the UK, the UK mortgage sector can be hugely influential in helping borrowers reduce emissions from their homes, as well as the costs of their energy bills.”
He added that the number of products available has risen from three to 50 in recent years, and while they’re “not always the most competitive”, lenders’ Net Zero targets for the future mean expansion and innovation is likely. He added:
“The government has also indicated it is considering further action and will report by the end of this year on potential initiatives for all housing tenures. This includes the possibility of legislating for new minimum EPC ratings for homes, creating further drivers for growth in ‘green’ lending.”
He did, however, add the caveat that this strategy poses a credible risk to lenders:
“If lenders fail to develop credible plans to meet their stated decarbonisation targets, the FCA is likely to take a very dim view – and it could be perceived by the market as yet another example of greenwashing…
…There is also a separate risk that innovation in products and incentives could run ahead of consumer demand.”
He went on to highlight the key role brokers have to play in helping borrowers navigate a “complex and nuanced” landscape in terms of green home finance. He also noted various Consumer Duty considerations for ESG products centred around suitability, and the more specific a consumer is about their requirements, the more specific a broker will need to be in the advice they give to them.
Trudy Woolf, Sustainability Director, Legal & General Surveying Services, commented:
“It is fantastic to see the FCA reaffirm its commitment to sustainability and green home finance, noting ‘rapid development’ in this area.
However, brokers and lenders must also prioritise their sustainability efforts if we are to see substantial and long-term gains in decarbonising the UK’s housing stock. Despite all the positive discussions within our industry, customer awareness, education, and understanding of green mortgages also remains low, meaning that green mortgages hold huge untapped potential. Our industry must plug the education gap if we are to decarbonise the industry and create a better future for all.”
