What is a green mortgage?
The term ‘green mortgage’ can relate to a number of different types of mortgage deal, but the common theme is that they all offer the buyer some form of an incentive to own a more energy efficient home. Incentives range by lender and the type of home, but can range from more competitive interest rates to additional borrowing.
There are a growing number of lenders offering green mortgages to the eco-conscious consumer. A range of products exist which enable buyers to purchase both new build properties that have been constructed with minimising environmental impact in mind, and for older properties that the buyer intends to improve the environmental status of.
What are the benefits of a green mortgage?
The exact benefits vary depending on the lender and product, but typically include:
Better mortgage interest rates
Many lenders offer a more competitive interest rate so long as your property meets their definition of ‘green’. This is usually measured by the EPC (Energy Performance Certificate) rating, and most lenders reward those homes that achieve category A or B.
This type of deal is typically available for both mortgage and remortgage purposes, so it pays to purchase an energy efficient home at the outset of your home ownership journey.
Cashback on your mortgage
On a similar basis to the above, some lenders offer the option to choose cashback on the completion of your mortgage or remortgage, rather than better interest rates.
A loan for green home improvements
Some lenders go one step further by providing you with the additional funds on top of your mortgage loan to carry out green home improvements.
This is a great option for those looking to buy an older property or remortgage their existing property, whilst investing in its future sustainability and energy efficiency.
The loan can be used for any improvement that could increase the EPC rating of the property, for example, replacing single-glazed or ill fitting windows, the installation of solar panels or insulating the loft and walls.
Lower cost of living due to cheaper energy bills
A more energy efficient home will, by nature, be cheaper to run. Proper insulation and modern, well-maintained heat and energy supplies will minimise the cost of utility bills in the long term.
Future proofing the value of your home
Green mortgages are expected to become more prominent in the future, as the world continues to strive for more sustainable ways to live. This means that lenders are beginning to view energy efficient properties as less of a risky investment in the long run. This is sometimes referred to as properties having ‘green value’.
Properties with greater eco-credentials are therefore more likely to hold their value in the future, and remain desirable to modern buyers. This is especially true in the Buy-to Let market, as landlords will need to ensure that all of their properties meet minimum energy requirements from 2025, in order to be able to offer them to let.
Are you eligible for a green mortgage?
Each mortgage lender and product will have its own set of criteria, much like any other mortgage deal. However, the green eligibility focuses on the energy efficiency (or potential to be made energy efficient) of your chosen property.
Some lenders will look at the EPC (Energy Performance Certificate) band to define the level of energy efficiency your home has, and most will be looking for properties to fall into categories A or B. Others tend to use the actual numerical value associated with the EPC rating of your property, and in this case a rating of 80+ is typically required.
Of course if you’re looking for a green mortgage with the benefit of a loan to improve the energy efficiency of your home, you won’t need to have a qualifying EPC rating or band at application, but will need to show how the improvements you plan to carry out will help you to achieve this level of efficiency once they are in place.
What is an EPC rating?
All residential properties require an EPC, or Energy Performance Certificate, when they are built, sold or rented. An assessment is carried out to establish the level of energy efficiency your home offers and will be categorised on a scale from most to least efficient using either A to G and/or 100 to zero.
An EPC lasts for 10 years, but you can apply for a new assessment if you have renovations carried out to improve the rating. If you are purchasing a new build home that is not yet complete, a PEA (Predicted Energy Assessment) should be available for it.
Older properties are typically harder to achieve high energy efficiency ratings for, as they weren’t built with modern energy consumption in mind.
Which lenders offer green mortgages?
There are a small, but growing number of mortgage lenders offering green mortgages, including some major high street banks and a range of building societies and specialist lenders.
For example, Barclays’ ‘Green Home Mortgage’ products are available to residential and Buy to Let buyers, however, this is currently only for new build properties with an EPC rating of A or B or above 81. NatWest, on the other hand, offers its green mortgage product for both mortgages and remortgages on any property that is able to achieve an EPC rating of A or B.
Amongst building societies, green mortgages are slightly more common, with Nationwide offering both a cashback option for those properties already rated A or B, as well as a ‘green borrowing’ option for those looking to borrow an additional amount to improve the energy efficiency of their home.
Also noteworthy in the category of green mortgage products are Ecology Building Society, who are a specialist finance company for those looking to carry out special projects, such as the construction of innovative self-build homes with a focus on sustainability.
Our partner, Mojo Mortgages, can provide you with a free mortgage comparison service, no matter what type of mortgage you’re looking for
Are green mortgages cheaper than regular mortgages?
In theory, green mortgages should be cheaper than conventional options, as lenders tend to reserve their most competitive rates for this purpose, meaning that the green mortgage should work out to be the cheapest option that each lender offers.
In reality, however, there are lenders not necessarily offering green mortgages, who have lower typical rates than those offered by green mortgage providers. As rates have risen quite sharply across the entire industry in recent months, this means that, unfortunately, green mortgages won’t always be your cheapest option in the short term.
It could be argued, however, that as a longer-term investment, buying an energy efficient home now will help you retain its value and potentially achieve lower remortgage rates in the future. If you’re looking at the wider picture, the savings you make on energy may also outweigh any additional costs on interest, especially if they are negligible, so it’s certainly worth exploring this further, if ethical consumerism is your major focus.
Who would currently benefit the most from a green mortgage?
At the current time, green mortgages are unfortunately not going to be the cheapest option for every buyer, however, there are still two types of mortgage applicant that would likely benefit from choosing a green mortgage:
Mortgage prisoners
If you’re in the position where you want to switch mortgages to get a better interest rate, but you’re currently unable to due to a lack of equity, bad credit or a decline in financial circumstances, you could still potentially benefit from a green mortgage, should your existing mortgage provider offer one.
Product transfers are where you move onto a different mortgage product with the same lender, and those unable to remortgage often take advantage of this option, as lenders don’t tend to carry out affordability or credit checks when they process them.
If your lender offers green mortgages and your home meets the minimum energy efficiency rating rating, then this may well be your cheapest option.
Buy to Let landlords
Whilst a good EPC rating has only offered landlords the benefit of potentially attracting more prospective tenants until now, new legislation means that all tenancies beginning from 2025 will legally have to offer accommodation with an EPC rating of C or above. There is also a longer term goal that this EPC rating is mirrored across the entire rental market, including existing tenancies, by 2028.
This means that for those looking to invest further, those properties already achieving a high EPC rating or that could achieve one using a mortgage with green home improvements funding, will carry longer-term benefits, assuming they plan to hold onto their rental properties post 2025.
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