Ethical mortgages may not be the first item on the list of options you put before your client, but if you are not aware of what benefits they offer you could be doing them a disservice.
A number of providers offer ethical, or green, mortgages – the best known being The Co-Operative Bank, the Ecology and Norwich and Peterborough. Yet the facets of each type of offering are different depending on the organisation so it is wise to do your research before you plump for one over the other simply because your client has an ethical bent.
Simon Tyler, managing director of Chase De Vere Mortgage Management, says ethical mortgages are tricky because they can be highly subjective.
“However,” he adds, “the way they are generally defined for mortgages is not by the structure of the product so much as where the loan comes from. The most ethical loans come from companies such as the Ecology, which concentrates on lending money for renovations of listed buildings, big renovation projects, and environmentally friendly new-build projects.”
This, says the Ecology, is ethical because it regenerates existing buildings rather than creating demand for new properties.
“However, few lenders are this strict about their lending policy,” says Tyler. “And, of course, not many borrowers qualify for loans that are this ethically demanding.”
There are generally two types of client who will consider ethical mortgages, those with a need and those with a choice, says Rob Clifford, chief executive of mortgageforce.
“Some people need a solution in view of the condition of the property,” says Clifford. “But we sometimes have clients who are interested in a lender with an ethical investment policy. We do occasionally get people who are personally inclined to look at financial providers who are trading ethically.”
The Ecology is the youngest of the building societies, set up in 1981 by members of the Green Party. As you can guess from the name, its stated aim is to help the environment through its lending practices.
“We are growing,” says society spokesman Paul Thomson. “There is a healthy demand for what we offer. Most of our lending is for residential mortgages for the renovation of property to bring it back into use, and for self-build mortgages where there is a low impact on the environment – low energy expenditure and high levels of insulation, for example.”
What you have to bear in mind, he adds, is that a number of the people who approach the Ecology have already had their projects turned down by high street lenders.
“We are happy to consider unusual properties,” he says, pointing out that the society has loaned money on properties as diverse as lighthouses, signal boxes and even a pumping station.
“We are happy to consider timber properties and encourage the use of vernacular building techniques. For example, we will consider cob-built and earth-sheltered dwellings.”
A diverse range indeed. So what makes up the typical property?
“New properties will have high levels of insulation and often make use of renewable forms of energy,” explains Thomson. “Many use reclaimed bricks, stone slate and timber from demolished properties and locally produced materials thus reducing the energy costs of transportation.”
It all sounds admirable but having such strict lending criteria is not without its drawbacks. So far just 700 borrowers have signed up to the Ecology's offering. It only provides one mortgage, a variable rate at 6.05% which will rise to 6.3% in October.
“We keep things simple. We don't have a range of discounts or cashbacks. We want to cut down on new building so bringing redundant buildings back into use is the same as recycling,” says Thomson.
“Then we are reducing demand for new buildings. But where people are self-building, the property has to meet our environmental criteria.”
As many of the properties it lends on are in a poor state of repair, the Ecology will lend funds upfront on the improved value of the property and then release further funds as the repairs are carried out and the property value increases. It will lend up to 90% LTV so if you have a client who has been turned down by a number of high street lenders because of the state of the property it may be worth checking whether the Ecology would provide a mortgage, provided your client is prepared to stick to its criteria.
The Ecology practices what it preaches and its new headquarters building at Silsden in West Yorkshire meets a high level of ethical building criteria.
“It has high levels of insulation,” says Thompson. “Where possible materials are from renewable sources, recycled or of low toxicity. Much use is made of parallam made from the outer layers of trees that would otherwise be discarded.
“Paints and finishes are from natural products and are solvent-free. Mosaic tiles are made from recycled glass. There is a nature roof which replaces a lost habitat for bird and insect life. It has sunpipes to maximise natural light and a rainwater harvesting system.”
Thankfully, self-builders would not be expected to go to such extreme lengths as this.
A more mainstream source of ethical mortgages The The Co-Operative Bank which has a range of mortgages, including fixed rates, a tracker and discounted products, which provide more choice than the Ecology.
It does not specify environmental measures as does the Ecology but will donate a value equal to 20% of the average carbon emissions for a home to a charity called Climate Care which is dedicated to preventing global warming, for every borrower it signs up. As Mortgage Strategy went to press the bank was offering a two-year fix at 5.64% alongside its SVR of 6.34%, something it is quick to point out is still lower than big lenders like Halifax and Abbey.
“One thing we would encourage everyone to do is consider the whole mortgage package,” says The Co-Op Bank media analyst Andy Hammerton. “Customers and brokers should not just look at the headline rate. For example, we don't charge mortgage indemnity premium. It is about a whole package of benefits and our mortgages are flexible. You can pay down or take a payment holiday.”
Anyone making a new purchase will also be offered a guide showing how to make a home more energy efficient, says Hammerton.
“We don't restrict ourselves to a market. We are a high street bank and we look to carry out the practices that our customers want.”
The Co-op Bank will also pay legal and valuation fees for remortgagers. This is often appealing to clients.
Any customer of The Co-Op Bank gets to have a say in its ethical policies, which some clients who are particularly keen on environmental issues welcome as a by-product of taking a loan with it.
“The Co-Op Bank does not lend to companies that operate in certain areas such as the weapons industry,” says Tyler. “Firms that screen out that type of activity from their investment policies are rated fairly highly. And The Co-Op Bank also gives some of its profits to various good causes.”
Mutual building societies are also classified as ethical by many brokers because they are not banks and so do not lend to controversial businesses. Rather, they are owned by their members and the money is used to lend to other homeowners. This avoids businesses that ethical investors would object to.
“The Co-Operative Bank and Nationwide would therefore both be classed as ethical and both often offer competitive deals,” says Tyler. “Nationwide is offering a base rate tracker pegged at 0.04% over base for two years, giving a rate of 4.79%.”
Of course, the fact that any building society can claim an ethical stance could be considered to be taking the argument to its extreme and is an example of how difficult and subjective an ethical stance is.
Rachel Blackmore, external affairs manager of the Building Societies Association, says that societies generally stick to mortgage and savings products.
“They are not involved in complex funding of, for instance, tobacco companies,” she argues. “Also they exist to support the communities in which they operate and to deliver best value for members and so are the logical first port of call for anyone interested in buying ethical products.”
Norwich and Peterborough is another that has decided to set out its stall with green mortgages and has even run a competition with a prize of £5,000 for a self-build eco-friendly property. This is open to anyone undertaking a self-build, not just its own customers. It launched its first green mortgage in 1998 and in 2000 added a range of what it calls carbon neutral mortgages.
“We have added two more carbon neutral mortgages to our range of green mortgages,” says N&P group product manager Gary Lacey.
N&P's new green four-year fixed rate mortgages at 5.64% without incentives or 5.79% with incentives, are available now for homebuyers and remortgagers of residential properties.
For every green fixed rate mortgage that is taken out, N&P will plant enough trees to offset the carbon dioxide emissions or greenhouse gases caused by using fossil fuels in the home for cooking, heating, lighting and so on, for five years.
“We hope these fixed rate mortgages will stand out from the thousands currently available as there are no other four-year fixed rates out there,” says Lacey. “Our objective is to raise awareness that housing causes more harmful emissions than cars. If we are responsible about making our homes more energy efficient then we can make a difference to global warming.”
N&P will offer a free energy survey for homes so that the buyer knows what can be done to boost energy efficiency and save money. There is an early repayment charge of 3% if the loan is paid off within the first four years, and it will lend up to 90% of the value of the home.
As there are a number of lenders to choose from offering a range of deals there is no need for your client to pay over the odds to go green, says mortgageforce's Clifford.
“You can typically get a good rate from these lenders. But where a lender is taking a decision on a more unusual property and one expects the lender to price according to risk, the interest rate may not be the cheapest,” he adds.
Mark Harris, managing director of Savills Private Finance, says he has not had a single borrower ask him to provide their funds from an ethical company. He also disagrees with Clifford's assessment of the market being nearly even on price.
“If you are someone with an ethical outlook on life you may consider it but it is price versus beliefs. If you feel the most ethical building society is the Ecology but your rate is higher than, say, HBOS, it's a trade-off,” says Harris.
“I think that it is fine to pay more for ethical beliefs on a credit card but your mortgage is likely to be the single most important financial decision you ever make.”
And James Cotton, mortgage specialist at London & Country, agrees that it is not as common to be asked for an ethical lender as it is to be asked for an ethical investment firm.
“If there was a lender that did have competitive rates we would look at them and recommend them. We would certainly not discount them because they were ethical, but would not necessarily include them because they are.
“If your client is sticking to their guns and looking for an ethical lender, they may be compromising on the rate they pay. But if you are looking to get a mortgage on a house that is made of timber or perhaps has solar panels, something a bit out of the ordinary, ethical lenders may be more inclined to consider it.”
Saving £34m through better energy usage
Earlier this month Nationwide launched a free guide designed to help its members save money by making their homes more energy efficient. Packed with handy hints and information the new guide sets out where to start with energy efficiency and other environmental improvements to the home. It provides illustrations of a range of home improvements depending on budget and house type. If every member who owns their own home were to undertake a single low cost energy efficiency improvement, collectively they would save over £34m. As well as saving members money through energy efficiency measures, the guide also contains tips on saving water and how to buy greener DIY products.
Stuart Bernau, Nationwide's commercial and treasury director, says: “As we approach the autumn and the nights draw in, now is the time to think about ways of saving energy. Quite often saving energy is easier than you think. For example you could save around £7 a year on your electricity bill just by changing one light bulb to an energy efficient one. With energy prices expected to rise steeply over the next few months we hope the guide will help our 11 million members make their homes more energy efficient and save money too.”
Where the savings come from
The £34m saving is based on the following calculation:
Nationwide has 11 million individual members, which represents 7.5 million households Around 5.5 million member households are owner-occupiers (own their house outright or with a mortgage) If only around one third of these members (1.9 million) made one of the low cost (less than £200) home improvements contained in the new guide, they would save around £18 per year in lower energy bills Therefore: 1.9m x £18 = £34.2m.
On average to make this kind of saving in energy would require a one-off cost of around £63. The investment would therefore pay for itself in reduced energy bills in 3.5 years.
The free publication is printed on recycled paper and is available from Nationwide branches.
For an online version of the guide, visit www.nationwide.co.uk/energy
The green sector is seen as a bit of a joke
Kevin Paterson is managing director of Park Row Mortgages Green mortgages are a diminishing niche and today there are only a handful of lenders courting this business. I suspect the reasons for this range from lethargy on the part of the consumer to the gimmick factor of being labelled a green lender.
We all want to be green, meaning environmentally friendly, but not if it costs more so concern for the planet is in direct proportion to the cost and unfortunately the green lenders don't tend to be at the cutting edge of competitive interest rates.
The gimmicky aspects of the green mortgage arena do not help the cause. For example, Norwich and Peterborough will plant eight trees in the first five years of the new mortgage thereby hoping to make it carbon neutral. Quite why they can't plant them all in the first year is beyond me. And this is happening at the same time as vast swathes of green belt are being concreted over so you could be forgiven for thinking that the green efforts of N&P are a drop in the ocean. Equally, I am sure the charities that benefit from donations from these lenders are grateful but I can't help thinking it's all bit conscience-driven.
Don't get me wrong, I'm all for saving the planet but I just don't think using a mortgage as a weapon is very effective as there are a limited number of things this can achieve. It would be far more effective if the government took the lead and made it compulsory for all new homes to meet a significantly increased energy ratings and made the builders plant 40 trees for every house they build.
The green sector is also seen as a bit of a joke – the preserve of sandal-wearing Guardian readers and as such unlikely to ever make it onto the radar. In more than 21 years in the business I have never been asked for, or arranged, a green mortgage. Maybe I'm just not looking hard enough.
That said, if more lenders took a lead from The Co-Op, N&P and the Ecology then the environment would benefit. Unfortunately while the green flag is being waved by such a small clutch of lenders the impact on the environment will be minimal and most of the intermediary community is unlikely to take the options seriously enough to promote them along with mainstream deals.
And there's the rub. Without the volume, green lenders are unlikely to become more competitive but they are not going to get the volume until they are more competitive. Under regulation, cost is going to be the primary driver for advice so I'm not sure the green approach can survive in its current form.
N&P offers £5,000 reward for eco-builders
An estimated 20,000 people self-build their homes every year and many more dream about it. And one self-builder that has made environmentally-friendly features a priority in their new home could win £5,000 for doing so.
The aim of green mortgage lender Norwich and Peterborough's competition is to raise awareness of how homes can be built in a more environmentally-responsible way.
The competition is open to all homeowners (not just N&P mortgage customers) who have undertaken a self-build that is kind to the environment. The winner will be the entrant whose property has, in the opinion of the judges, made the most positive impact on the environment. The prize is £5,000 in cash.
There are many green or energy-efficient features that can be incorporated when building a brand new home including:
Building on a brownfield site (not on virgin countryside)
Recycling systems that re-use household water
Super-efficient insulation and/or double-glazing
Energy-saving central heating/water heating systems.
Those interested in entering the competition can pick up a leaflet from any N&P branch or telephone the society's contact centre on 0845 300 2522.
Last year's winners, Lincolnshire architect Jerry Harrall and his family, made environmentally-friendly features a priority in their unusual 'teletubby' home near Spalding. Jerry and his partner Kay Woods describe their four bedroom, single storey, earth-sheltered home as a 21st century low-carbon dwelling. Jerry, a chartered architect with Sustainable Ecological Architecture Limited (SEArch), occupies Europe's first and only earth-sheltered architect's office on the site.
Graham Wood, managing director of N&P's surveying arm Hockleys, and one of the judges of the competition, said at the time: “This is one of the most exciting residential developments I have seen in my 36 years as a surveyor and is a worthy winner – truly a grand design.
“The aim of the competition was to raise awareness that including more energy-efficient features in house-building is an option for everyone from major developers down to individuals. Making homes energy efficient saves people money and helps the environment – everyone wins.”
Terms of entry
Open to anyone who has built a one-off residential property, completed to their individual specification in the UK between July 1 2003 and June 30 2004, either by themselves or using a building contractor The winning entry will be the property that is the most environmentally-friendly (in relation to location, construction, type, features and value) in the opinion of the judges. All properties must be in receipt of their NHBC certificate or equivalent guarantee/insurance documentation in order to be entered.
All entrants must still be residing in the property they are entering as at December 31 2004. All entrants must complete an entry form. Entrants may submit photographs or other evidence of their work. All entrants, by submitting an entry, agree to accommodate a visit to their home by the judges if shortlisted. Competition closes December 31 2004.