Are Mortgages Tied to Green Home Improvements?

The UK has set an ambitious target to achieve net-zero by 2050 or sooner. To meet this pledge, there needs to be a serious focus on making the ageing housing market more energy efficient. 

In a bid to decarbonise UK homes and move towards net-zero, the government is discussing plans to link mortgages to green home improvements by introducing green targets for mortgage lenders. Here is everything you need to know about the new proposals.

Clean Growth Strategy: EPC C Challenge

The UK’s Clean Growth Strategy sets out proposals for decarbonising all sectors of the UK economy – from transport and housing to energy and business. As part of the strategy, the government has set a target for all homes to achieve a minimum Domestic Energy Performance Certificate (EPC) of C by 2035.

This will play an essential part in helping the UK achieve its climate change targets and make all homes net-zero by 2050. Government statistics show that the average energy efficiency score for properties in England and Wales is D, while most older properties have a rating of E or below. Improving the energy efficiency of all UK properties to EPC band C will be a monumental challenge and there is a long way to go to achieve this target.

EPC targets for mortgage lenders

The UK government is currently discussing ways that mortgage lenders can help homeowners improve their energy ratings through the Green Mortgage Scheme. The goal of the scheme is to encourage lenders to support homeowners in improving the energy efficiency of their properties.

Under the scheme, mortgage lenders may be given targets to improve the average EPC rating of the properties in their lending portfolio to at least band C by 2030. These targets will be voluntary, but the government has said that they may become mandatory if insufficient progress is made. You can find out more about the proposals by reading the government’s report on Improving Home Energy Performance Through Lenders.

Green mortgage deals and rewards

Many well-known lenders like Natwest and Halifax have already introduced green mortgages in a bid to improve the energy efficiency of their lending portfolio. These mortgages offer customers deals and rewards if they choose to buy energy-efficient properties. Currently, this typically means that borrowers get a slightly lower interest rate, favourable contract terms, or cash back when they apply for a mortgage.

Some mortgage lenders are also allowing their existing customers to borrow additional money to pay for green renovations. For instance, Nationwide is offering customers between £5,000 to £25,000 at a discounted rate, as long as a least 50% of their new advance is spent on energy-efficient home improvements. Green retrofits may include replacing draughty windows and doors or installing solar panel systems.

Green mortgages have been around for a while, but according to Financial Reporter, “94% of brokers are yet to sell one despite 39% of lenders stating that they will offer a green mortgage product by the end of 2021.”

The risks of introducing green mortgage targets

Green mortgage targets could play an important role in reducing emissions in the housing market and creating energy-efficient homes. However, there is concern that introducing EPC targets for lenders could disadvantage poorer customers as it will discourage lenders from having less energy-efficient homes in their property portfolios.

Poorer customers may struggle to pay for green renovations and improve their homes energy ratings. This means they risk being unable to meet the mortgage requirements and may be refused a loan. Customers may also find themselves trapped in expensive contracts and unable to take advantage of better deals from new lenders who refuse to take on less efficient homes.

It is important that the government supports homeowners on low incomes and ensures that lower-performing homes have attractive and affordable options for making green home improvements.

Bottom line

Homes currently contribute more than a fifth of the UK’s total carbon emissions, which explains why the government is introducing schemes to make properties more energy efficient. Progress has been made, but there is a long way to go to decarbonise the UK housing market and tackle fuel poverty.

The Green Mortgage Scheme, if introduced, will be one of the most radical changes to the lending sector since the financial crisis back in 2008. Many people believe that green mortgages could play a vital part in achieving net-zero and creating a more sustainable future.