In the afterglow of COP26, we review one of the financial incentives that the UK Government will be increasing focus on in the coming years – Green Mortgages.
With homes accounting for more than 20% of the UK’s CO2 emissions, owning an energy efficient home will become even more financially beneficial in the future.
Securing Cheaper Finance On Energy Efficient Properties
The UK government has introduced targets for net zero carbon reductions and set out ways in which we can reduce our carbon output in their net zero strategy. This includes moving to electric vehicles, phasing out gas boilers and increasing energy efficiency within homes.
Earlier this year the UK government announced the outcome of the Future Homes Standard, which plans to amend building regulations to significantly reduce new home carbon emissions from 2025 onwards (these changes will also apply to landlords who rent homes to tenants). These changes will have a big impact on the property industry.
Energy Efficient “Green” Mortgages
Mortgage lenders are already incentivising those that own energy efficient property. Homeowners that live in a property which is energy efficient can benefit from reduced interest rates, potentially saving thousands of pounds each year in mortgage interest. In this article we will explore the different green mortgage options, including residential homeowner green mortgages, buy to let green mortgages and development finance for energy efficient homes.
How Do Green Mortgages Work?
Green mortgages work by applying a lower rate of interest to homes which attain an Energy Performance Certificate (EPC) with a top rating of A or B.
Are Green Mortgages Cheaper?
Green mortgages are cheaper than standard residential mortgages, but only with lenders that offer a green mortgage option.
At the time of writing (December 2021), rates for residential mortgages are typically up to 0.11% cheaper from lenders that offer green mortgage incentives. (As an example, NatWest offer a green mortgage rate of 1.54% compared to 1.65% for standard product, based on a 5 year fixed-rate mortgage).
We should point out that not all lenders offer green mortgage incentives and there are lenders offering cheaper standard mortgages than those lenders offering green mortgage products. Therefore, it is not necessarily a given that a green mortgage product will be the cheapest on the market.
Green Mortgages For Energy Efficient Buy-To-Let Properties
A let property must currently, by law, have an EPC rating of E or above. By 2025, newly let properties will need to have an EPC rating of C or above. Many properties fall below this, so landlords should be taking measures to increase the energy efficiency of their property portfolio now.
Several lenders are offering discounted rates to properties with an EPC rating of A or B. The rates are, on average, 0.1% cheaper than their standard rates. Again, this isn’t to say that they are cheaper than the rest of the market (including lenders which do not offer green mortgage incentives).
Buy-To-Let green mortgages are available for remortgages and purchases on property held in both personal and limited company names.
Development Finance For Energy Efficient Homes
Development finance is an area of finance that has seen huge incentives, including reductions on the rate and fees. Lenders recognise that energy efficiency in a home should start with those that build them, and developers are aware that they can obtain significant financial benefits if they successfully build properties with the best EPC ratings.
There are now a growing number of lenders that offer up to 50% reduction on arrangement fees and a significant reduction (up to 2% per annum) on the finance rates. Across all property finance, it is development finance which offers the greatest savings, so developers should take note and start building greener homes sooner rather than later.
EPC Ratings In England
During 2020, there were 215,000 new build EPCs lodged. The results of which are detailed below:
A rating – 1.4%
B rating – 81%
C rating (or below) – 17.6%
Whilst these figures are good and show new builds are leading the way, unfortunately existing buildings are lagging.
In the same year across all property types (new and existing), there were 1,430,000 EPCs lodged and a massive 84% were at C or below. Clearly there is a huge amount of work (and expense) to be done to get existing properties up to an EPC rating of A or B.
How To Make Your Home More Energy Efficient
We have established that there are cheaper finance options available to homeowners with EPC ratings of A or B, and it is likely that these incentives will become more widely available as we get closer to 2025, but just how do you go about making your home more energy efficient?
6 Ways To Make Your Home More Energy Efficient
There are a number of different ways a home can become more energy efficient, with the following being among the most popular to implement.
Upgrade your boiler
As much as 50% of a household energy bill is for heating the home and the water. Modern boilers are “condensing”, which makes them more efficient as they re-use a lot of the heat that would otherwise be lost with an older boiler.
Install a ground source or air source heat pump
Heat pumps absorb heat from the environment (either the air or the ground depending on which type of pump you choose) and transfer it to a fluid before compressing it and using it to heat the home or water. Buying and installing a heat pump is considerably more expensive than traditional heating methods, though the operational savings quickly start to repay the investment.
Improve your loft, floor and (cavity) wall insulation
As much as 25% of your heat can be lost via the roof of an uninsulated home, so this can be one of the best (and most cost-effective) ways of improving the energy efficiency of your home.
Install double (or triple) glazing
While double glazing can reduce heat loss by around 30% in comparison to single glazing, triple glazing can be as much as 40% more effective than double glazing. While triple glazing can be as much as 50% more expensive than double glazing, the lifetime energy savings should make it a cost effective improvement.
Use a smart energy meter
While smart meters don’t automatically save energy, they provide households with information surrounding their energy usage, allowing them to take appropriate action. Some studies show that as much as 85% of households have taken steps to save energy since having a smart meter installed.
Use energy efficient lighting
The cost of replacing a 50W halogen bulb with an energy efficient LED equivalent varies between £3 to £12. While the initial investment can quickly add up, each bulb can save as much as £75 over the lifetime, quickly making them a cost effective solution.
Green Mortgages Conclusion
We are a long way from meeting government targets to reduce our carbon emissions. As we have highlighted, most existing homes fall short of government targets.
Property finance companies have started to incentive us to have more energy efficient homes, yet most people can get a cheaper mortgage outside of the green mortgage range. Therefore, we will need a lot of government backed lending incentives to bring down the cost of lending for green mortgages and to have any real impact.
We have seen regulation changes to cladding and EPC ratings that have left some properties needing thousands of pounds spent on repairs to make them mortgageable. These impending regulations will have similar consequences and should not be ignored.