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News analysis: Does the ‘green mortgages’ fund go far enough?

While many industry experts have welcomed the concept, some have dismissed the scale of the £5m fund as a ‘drop in the ocean’

The government has launched a new £5m fund to encourage lenders to develop ‘green mortgages’ that reward borrowers for making energy efficiency improvements in their home.

The announcement came as part of the Green Finance Strategy unveiled by ministers last week, with the aim of helping the UK meet its commitment to bring net carbon emissions down to zero by 2020.

While many industry experts welcomed the concept in principle, some dismissed the scale of the £5m fund as ‘a drop in the ocean’, when lending volumes were £22bn in May alone and there are 25 million homes in the UK.

It is not the first time green mortgages have been on the agenda for policymakers, with a pilot already under way among lenders across Europe. The latest government launch did not define in detail what products should look like, apart from to say that they would “give borrowers discounted mortgage rates when they have upgraded the energy rating of their home”.

However, there will be a national supplier day within the next month or so to outline how lenders can compete for a share of the fund. A further £10m innovation fund will be shared between companies that design cost-effective ways of retrofitting old housing stock with energy efficiency measures.

Launching the initiative, energy and clean growth minister Chris Skidmore said: “By rolling out more green mortgages and reducing the costs of retrofitting older homes we are encouraging homeowners to improve the efficiency of their homes and save money on their energy bills, helping to ensure everyone has access to a warm and comfortable home.”

Homes are responsible for 15 per cent of the UK’s carbon emissions and around 17 million residential properties have an Energy Performance Certification rating of C or below, the government said.

Borrowers whose homes have a higher energy efficiency rating are less likely to be in arrears according to analysis by two Bank of England staff members, Benjamin Guin and Perttu Korhonen, published last year. But their findings were presented only on the Bank Underground blog, where staff can share views based on projects they are working on, rather than as an officially endorsed paper.

The pair found that 0.93 per cent of mortgages on the most energy-efficient homes (rated A to C) were in arrears compared to 1.14 per cent on inefficient properties (rated E to G). This may be the result of lower energy bills putting less pressure on household finances, as the cost of heating an energy-efficient A-to-C-rated four-bedroom home is on average just £695 a year, compared to £1,775 for one that is rated E to G.

Ecology Building Society has been providing mortgages for people wanting to build their own energy-efficient homes or retrofit existing properties for 30 years.

Chief executive Paul Ellis welcomed the government’s recognition of the need
for financial services firms to support the transition to a low-carbon economy but says “there isn’t much evidence of ‘turbo-charging’ the UK’s green finance sector, as ministers have suggested”.

Ellis warns: “Given the past missed opportunities, we need to move beyond the age of pilots and reports to tangible actions at scale as soon as possible.”
Brokers praise Ecology’s willingness to lend on unusual properties, different types of energy-efficient construction and offer finance in stages. But even for the most eco-friendly homes its lowest rate on offer is 3.4 per cent.

The Melton Building Society also offers a self-build eco mortgage for homes aiming for an energy efficiency rating of A or B, but its rate is 4.09 per cent at 75 per cent LTV.

Barclays is the only major bank to offer any form of green mortgage. However, these are restricted to newly built properties from a list of approved developers. In its Green Home Mortgage range, a two-year fixed rate at 90 per cent LTV currently costs 2.13 per cent, while the closest alternative in the standard range costs 2.18 per cent – equivalent to a saving of £5 a month on a £200,000 loan with a 25-year repayment term.

While the scheme is a nice bonus for those buying new-build properties, it does nothing to support the retrofitting of older homes, which are the main culprit for carbon emissions. Government figures show that 94 per cent of new homes are rated A to C, compared to 39 per cent of existing stock.

UK Finance says it is ready to play its part in the government’s Green Finance Strategy, but has yet to comment specifically on the green mortgages fund. In an article last year following Guin and Korhonen’s conclusion that “the energy efficiency of a property is a relevant predictor of mortgage risk”, UK Finance said that “correlation is not the same as causation, and not all are convinced by the Bank’s argument”.

It said there may be many socio-economic and geographic factors impacting the apparent relationship between risk and energy efficiency. Intermediary Mortgage Lenders Association executive director Kate Davies also believes that more work is needed to clearly establish this link.

On green mortgages, she says: “Anything which makes a serious attempt to improve the energy efficiency of homes is a step in the right direction, but we need to look in detail at the practicalities.

“It is not immediately obvious how they could work in a way that is cost-effective and makes best use of the money on offer for both lenders and borrowers.”

Building Societies Association head of mortgages and housing Paul Broadhead warns that there was low take-up of the Green Deal, a previous government initiative to promote retrofitting, but he hopes that the current mood around climate change will lead to higher demand.

Your Mortgage Decisions director Dominik Lipnicki says: “Encouraging people to be more green is a fabulous idea, but £5m will not even scratch the surface – it is a gimmick.”

Ash-Ridge private finance mortgage consultant Jane King agrees that the pot of money on offer for product development “is a drop in the ocean”. She says for any changes to be successful, lenders must take a consistent approach to which energy-efficient home improvements they allow within standard criteria.

Many borrowers have faced difficulties remortgaging after leasing out their roof space to pay for solar panels and King says she also had a client who had mortgage problems even though they owned the panels, because the fitter was not approved by the Microgeneration Certification Scheme.

“You also have to look at the outlay for customers, because if you are spending thousands of pounds on improvements but getting a fiver a month off your mortgage, is it really worth it?” she says.

Cherry Mortgage and Finance director Matthew Fleming-Duffy has been looking at how best to help clients improve the energy efficiency of their homes for some time. He has teamed up with Ridgewater Energy, a local consultancy in Dorset that offers borrowers advice on the most cost-effective changes to make in their own properties, the grants and incentives on offer and how to find trusted installers.

He would like to see the government provide clearer guidance and information to consumers looking to make these improvements.

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