The UK has been set the tough target of being a carbon "net zero" economy by 2050 – and our homes are now centre stage in this debate.
How “green” a property is will become more and more important as we move towards a net-zero society, and green mortgages will have a key role to play in that journey.
How could 'net zero' affect mortgage borrowing in the UK?
Reaching this ambitious climate goal is going to require a drastic reduction in carbon emissions from our homes.
In a bid to tackle emissions, some lenders are starting to offer green mortgages with incentives such as lower interest rates for less wasteful buildings.
Banking industry body UK Finance said: “Together with the government and Bank of England, lenders are supporting the transition to a low-carbon economy.”
How do green mortgages work?
A green mortgage offers a borrower an incentive either to purchase a green property, or to carry out work on an existing property to make it greener.
This is typically either favourable interest rates, cashback, or an increased loan amount.
Which lenders offer green mortgages?
A handful of mainstream lenders are already rolling out this type of home loan, including Barclays, NatWest, Nationwide and, most recently, Virgin Money.
Figures suggest there are currently around 27 green mortgage deals available.
Could having a 'green' home make it cheaper to borrow?
At present, for the main part, having an energy-efficient home just means a small saving in terms of rate – enabling you to trim a little off your mortgage repayments.
Barclays, for example, offers a range of products on new-build properties that have an Energy Performance Certificate (EPC) with a rating of A or B. An EPC rates how energy efficient a property is with a rating between A (the highest) and G (the lowest).
Andrew Montlake, of independent broker Coreco, said: “Barclays has just launched a rate of 1.97% on a two-year fix at 80% loan-to-value (LTV) with no fee. This is the best option with no fee on the market and compares to a rate of 1.99% on a standard product with Progressive Building Society.”
NatWest’s green mortgage range provides preferential rates on selected products for customers purchasing a property with an EPC rating of A or B.
Virgin Money has just launched its “Greener Mortgages” range giving customers who buy greener new-build properties access to a range of products priced 0.1% lower than equivalent products.
Elsewhere, Nationwide offers up to £500 cashback to energy-efficient homeowners.
Montlake added: “If you do have an energy-efficient property, it’s worth investigating green mortgages. That said, in many cases, you may still be able to get a better rate elsewhere on a standard product.”
It’s wise to compare the whole market before signing up to a particular deal.
Sam Harhat, of Andrews Mortgage Services, said: “It’s important to look at the overall mortgage product, including the LTV, associated fees and costs over the term of the mortgage.”
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Will more lenders follow suit?
Recent research from the Intermediary of Mortgage Lenders Association (IMLA) found that 57% of lenders plan to launch a green mortgage option after the pandemic.
But some experts feel there is still some way to go.
Rachel Springall, of Moneyfacts, said: “While green mortgages are becoming more desirable, for now, they are still rather niche.”
Montlake added: “Green mortgages have a place in our future, but to really work, they need to be more than just a gimmick – and come with bigger savings and benefits.”
What does all this mean for owners of older homes?
The government has committed to “build back greener” as we emerge from the pandemic. This is great news for those who buy a new-build home with a high EPC score of A or B, as this could mean cheaper borrowing.
But owners of older homes – which tend to have efficiency ratings of D or E – may be worried that going forward, they could face more expensive mortgages.
Harhat said: “At the moment, a home with a poor-rated EPC won’t make it more expensive to borrow. But if, down the line, lenders consider energy efficiency as part of their mortgage assessment criteria, this could result in it being harder to get a mortgage if you’re living in a home with a poor rating. It could also mean borrowers are unable to remortgage and could be trapped into paying their lender’s higher standard variable rate (SVR).”
Montlake adds that as the UK moves towards its net-zero goals as a whole, we could see lenders ultimately targeted on lending mainly to energy-efficient homes.
“This could mean a two-tier lending system where energy-efficient homes get the best rates across the board,” he said. “For the time being, though, this is not the case.”
Can I improve the energy efficiency of my home?
As some “green mortgage” lenders offer incentives to those who renovate a home to make it more sustainable, this could be another way to bring down the cost of borrowing.
For those looking to boost their home’s rating, improvements could include measures such as installing double (or triple) glazing, and insulating walls and lofts.
The government has said it wants all homes to reach an EPC rating of category C by 2030.
That said, recent reports suggested that an estimated 1.7 million “dirty” homes in the UK cannot be upgraded to improve their energy-efficiency rating above C.
At the same time, the government has also faced criticism over its decision to scrap the £1.5bn Green Homes Grant. This was designed to help homeowners in England insulate their homes by providing up to £5,000 for improvements, but was closed to new applications at the end of March, with no replacement.