The availability of green mortgage products has increased in recent years, from three in 2019 to more than 60 today.
The UK’s Climate Change Committee has estimated that £250bn needs to be invested in home upgrades by 2050, which means there is the potential for significant capital flow in green mortgages in the coming years.
Green mortgages are still a nascent market with limited traction in terms of take-up, but lenders and brokers have been doing more to raise awareness and promote the importance of sustainability and of making homes more energy efficient.
The big issue at the moment is that the majority of consumers don’t know where to start
Alexander Hall managing director Richard Merrett says: “Green has become a standard topic at large distributor events.
“We have seen lenders, clubs and networks promote the importance and benefit of engaging on the subject.”
Merrett suggests that green mortgages are a “real opportunity for all areas of the market to work together to support our mutual customers”.
In recent years, lenders have rolled out various product features — from cashback to enhanced affordability — but are these enough
to entice borrowers to take up a green mortgage?
Connect Mortgages chief executive Liz Syms says: “Green mortgages do have benefits but have faced criticism for their limited savings compared to traditional mortgages.”
She adds: “While new-build property generally qualifies, the cost of improving an older home’s energy efficiency can be prohibitive, which deters when the financial benefits do not outweigh the initial expenses.”
There should be clearer and more consistent guidance on how EPC ratings are calculated and how to upgrade a property.
Meanwhile, Xpress Mortgages director Rachel Lummis says it would help if lenders “sang from the same hymn sheet”. She explains that they tend to have different requirements and use different names for these products; for example, some use the term ‘green’ while others say ‘energy-efficient homes’.
Lummis states: “Lenders should have a specific name and rating requirement for these products, so we could see at a glance when to use them.”
However, Shaw Financial Services owner and independent mortgage broker Lewis Shaw thinks the current offering from lenders with green initiatives “isn’t going to butter any parsnips”.
Shaw explains: “A small — often one or two basis points — difference amounts to very little. On top of that, a one-off cashback payment of up to £1,000 isn’t going to cover the cost of solar panels. If lenders want to truly incentivise green homeownership, there needs to be a radical rethink.”
There is a need for government-backed initiatives combined with lender innovation that incentivise customers to take action
Brokers too play an important role in green mortgages, making borrowers aware of these products and their potential benefits.
Merrett says: “Given that many green products source most favourably, and the largest lender in the country has made it mandatory to capture the energy performance certificate [EPC] rating, brokers have to make customers aware.
“We have made it standard to record the EPC rating, which prompts the adviser to check if a more favourable rate or product feature, such as cashback, is available. The biggest challenge brokers have is that they do not have the same resources as lenders.”
Lenders should have a specific name and rating requirement for these products, so we could see at a glance when to use them
According to the Green Finance Institute (GFI), 83% of advisers say their clients have no understanding of green mortgages, and 14% say clients only partially understand them.
The majority (84%) of mortgage transactions are completed via an intermediary, illustrating the need for brokers to understand green mortgages and be able to educate customers on them and other green products. To help with broker education, the GFI recently launched a green mortgage training programme to drive the decarbonisation of the built environment. This provides training on the real-economy opportunities provided by green finance solutions, and is designed to educate mortgage professionals to understand, define and sell green products.
Merrett states: “The big issue at the moment is that the majority of consumers don’t know where to start. If people in general knew more about their options, knew how to access them and understood more about the grants available, the cost and availability of appropriate tradespeople and materials, then more would engage.”
Green mortgages do have benefits but have faced criticism for their limited savings compared to traditional mortgages
“What will really help now is for the market to collectively focus on the cost-saving benefits of adapting homes and behaviour. The more
education there is on this, the more consumers will seek help and advice.”
Instead of encouraging borrowers to select a green mortgage, says GFI associate director Rachael Hunnisett, the industry should ensure there is a range of products on offer so that all customers can retrofit their home.
She says: “This requires a fundamental understanding that no two customers’ circumstances are exactly the same. They range from buy-to-let landlords looking to make changes to their properties, to deep retrofit properties, social housing and more.”
Meanwhile, lenders are innovating at pace, embedding green options for a range of customers. Hunnisett suggests the market needs to back lenders and “encourage them on this journey by supporting and educating the very people who liaise directly with customers”.
Syms bemoans a lack of “government direction with continual shifting of EPC goalposts”.
Green has become a standard topic at large distributor events
She says: “There needs to be clearer and more consistent guidance on how EPC ratings are calculated and how to upgrade a property. There is also a need for government-backed initiatives combined with lender innovation that incentivise customers to take action.”
Merrett suggests a stamp duty rebate for people who make sustainability improvements.
He states: “We have seen the power that savings in this area can mean and, if this was the case, more people would start exploring making such changes.”
This article featured in the July/August 2024 edition of Mortgage Strategy.
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