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Green Mortgages Explained

Changes to green mortgages being considered by the UK government mean lenders will need to disclose the energy performance of the homes they lend on in England and Wales. But what are the implications for home buyers and home sellers? We take a look…

green mortgages

In the Government’s Heat and Buildings Strategy published in autumn 2021, the government reiterated proposals that it consulted on earlier this year, which would require mortgage lenders to disclose the energy performance of their mortgage portfolios.

It proposed setting ‘voluntary improvement targets’ for lenders to reach an average of Energy Performance Certificate band C across their mortgage portfolios by 2030. And this target may be made mandatory if ‘insufficient progress’ is made, it added.

As it stands, an energy performance certificate is required when a home is built, rented or sold. The most energy-efficient homes are rated A and the least efficient rated G. Currently, only 40% of houses have a C rating or higher.

And in order to help reach the target, the government wants more lenders to offer green mortgages. These incentivise borrowers to make energy efficient upgrades to their homes. The plan is part of the wider government strategy to make sure the UK meets its target to reduce emissions by 70% on 1990 levels by the end of the decade, on a path to net zero by 2050.

What are green mortgages?

Green mortgages reward you for saving energy in your property. Green mortgages already exist with lenders including Barclays, Natwest, Virgin Money and Nationwide.

Some lenders will give you lower interest rates or cashback and larger loans if your home meets a minimum energy-efficiency level. Other lenders will offer lower rates or cashback if you make energy-efficiency improvements. Or if you take out additional borrowing to pay for measures to improve your home’s energy efficiency.

Each lender will have its own terms and conditions for its green mortgages, but lenders generally offer green mortgages on homes with an EPC rating of A or B.

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How will the new proposals for green mortgages work?

Ministers hope that by setting targets for lenders, that they in turn will incentivise homeowners to undertake green improvements when they move into a new home.

However, concerns have been raised that this will discourage banks from lending on less energy-efficient homes. And that this could have a negative impact on some homeowners and buyers, including:

  • Increased costs for buyers: There are concerns buyers may struggle to get a mortgage on homes with a low energy-efficiency rating unless they commit to spending thousands of pounds on home improvements. And that this may hit first time buyers particularly hard.
  • Homes may become harder to sell and lose value: Concerns have also been raised for some homeowners who want to sell too. Timothy Douglas of Propertymark, which represents estate agents across the UK, said, ‘Incentivising green improvements to properties via lending creates risks of trapping homeowners with older properties, those who live in rural areas, listed buildings or conservation areas, making their homes difficult to sell and therefore reducing the value.’ Propertymark said that people living in older properties could be left with homes they are unable to sell if buyers weren’t able to get a mortgage on them due to their lower energy efficiencies.
  • It could create mortgage prisoners: Homeowners may find they’re forced to stay with their lender and unable to shop around for cheaper mortgage deals if lenders won’t offer mortgages on homes that are less energy efficient
  • It will hit the worst off: There are also fears that discouraging banks from having less energy efficient homes in their portfolios would disadvantage poorer customers, who are less financially able to improve their property’s rating.

Find out how much you can afford to borrow on a mortgage without overstretching yourself with our guide How Much Can I Afford?

What are the timescales?

The Government is considering plans to see lenders reach an average EPC band C across their existing mortgage portfolios by 2030.

How does this impact my mortgage application?

Currently, mortgage applications don’t ask how energy efficient someone’s home is. This is despite the fact someone living in an energy efficient home will have lower monthly outgoings and therefore be able to afford a bigger mortgage. However, we anticipate this is set to change.

Also, while some people will save money by choosing a green mortgage, on the whole any savings are fairly small – and savings of a few hundred pounds over the term of the mortgage is not enough to change behaviour. However, if the direction of travel is to further reduce the interest rates then green mortgages could have the potential to change consumer behaviour by making it worthwhile for them to put in place energy efficiency improvements. This in turn would  increase demand for – and thus value – of properties that have an EPC rating of A or B.

How much does it cost to make an old home more energy efficient? 

The cost of upgrading a property’s EPC rating from a D to a C is likely to be thousands, according to analysis by Habito. It calculated the cost of improving the rating of a one bed flat or properties measuring under 55m2 is up to £3,653. This increases to up to £6,400 for small mid-terrace houses (under 100m2). While for a large, detached family home of 100-200m2, the potential cost rises to up to £12,540.

And that’s assuming it’s possible to make improvements. Analysis from Rightmove earlier this year found 1.7million homes would be unable to ever reach a C rating.

However, for those who can improve their home’s EPC rating they may see their property value rise. A Rightmove study of 200,000 homes found that owners who upgraded their home from an F to C saw the value rise by an average of 16%. While moving from an E to C added an average of 8%. And moving from a D to C added an additional 4% on average.

Green mortgage lenders

There are a number of green mortgages already available from different lenders. These include:

  • NatWest

If you buy a home with a valid EPC rating of A or B you may be eligible for a Green Mortgage product. These offer a reduced rate on a 2 year or 5 year fixed rate mortgage. And you could also get cashback too.

For example: NatWest offers the 5 Year Fix Green Mortgage at 1.22%, with £350 cashback. This compares to its standard 5 Year Fix at 1.23%.

  • Nationwide

If you buy a home with a standard Nationwide mortgage, the lender will reward you with £500 cashback if the property has a score of 92 or above on its EPC. Or £250 cashback if the property has a score of 86-91. This is in addition to any other cashback offers.

It also offers the ‘Green Additional Borrowing’ mortgage; to qualify, you must spend at least 50% of the money on home improvements to make your property more energy efficient.

You can choose either a 2 year or 5 year fixed rate product at a discounted initial interest rate compared to the rate on its standard additional borrowing products.

For example: The 2 Year Fixed Green Additional Borrowing mortgage has a rate of 0.94% with no product fee.

This compares to the lender’s regular 2 Year Fix rate for additional borrowing of 1.04% with £999 product fee. This rate rises to 1.34% if you want a 2 year fix with no product fee.

Get expert advice on green mortgages from our partners at L&C. There’s no fee – just great service

Barclays Green Mortgage

Barclays also offers green mortgages. You can apply for a Barclays Green Home Mortgage if you’re buying a new-build property directly from the builder or developer and it has an energy efficiency rating of 81 or above, or is in energy efficiency bands A or B. And you could get lower rates on some fixed-term mortgages.

  • For example: The Barclays Green Home 5 Year Fixed mortgage has a rate of 2.60%, with no product fee
  • This compares to its regular 5 Year Fixed Rate mortgage which has a rate of 2.70%, with no product fee

Which other lenders offer green mortgages?

Some of the other lenders that offer green mortgages are:

  • Kensington offers the eKo mortgage which offers £1,000 cashback for improving your home’s energy efficiency, however you’ll need to raise your home’s EPC rating by 10 points within 12 months of your mortgage completion date. And you’ll need to pay for a new Energy Performance Assessment in order to get an updated EPC. Rates start at 3.29%, which is for a 2 year fix.
  • Saffron Building Society offers the 2 year Retro Fit Fixed Rate mortgage at 3.07%, also aimed at people who want to improve their home’s energy efficiency. If you show evidence of an improvement in EPC rating the rate will be reduced by 0.10%. The improvement should come within 6 months.

Mortgage Finder

Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.

Find a mortgage

Are green mortgages cheaper?

There is no simple answer to this. In some cases, if you already own a house with a high EPC rating you may find a green mortgage is the best option for you. Or it may be that you can get a better rate with a traditional mortgage with a different lender. And if you want to borrow more to undertake improvements to make your home more energy efficient, your best bet may be a green mortgage. But depending on what else is available, it might not be the cheapest option for you.

So you’ll need to shop around. It’s a good idea to speak to a broker. They’ll be able to search through all the options for you and find the best mortgage for your needs, whether it’s a green mortgage or not.

What are the advantages to green mortgages?

Here are some advantages to consider:

  • You may get a cheaper rate.
  • If you take out a regular mortgage you may still be eligible for cashback if your home meets certain energy efficiency conditions set by a lender.
  • By either buying an energy-efficient home to qualify for a green mortgage or by making improvements now, whether you do this by using a green mortgage or not, you may be future-proofing your property in case it’s harder to get a mortgage in the future for homes with low EPC ratings.
  • If you have a house with a high EPC rating, lenders may offer more flexibility when it comes to affordability because they will know your energy bills are likely to be lower. And having lower energy bills also has a financial benefit too.

For more advice on making improvements, see how to make your home more energy efficient.

Are green mortgages actually green?

Green mortgages reward you for saving energy in your property, whether by buying a home with a good EPC rating or by making energy-efficiency improvements. There are benefits to the environment if people do this.

How energy efficient is my home?

If you’re wondering how energy efficient your home is and your home has had an EPC in the last 10 years, you can check the EPC rating using this government site.

If you’re looking to sell your home or are interested in your home’s energy rating, then you can simply fill in a short form to get quotes from a local qualified energy assessors in a matter of minutes. You can then compare quotes and book your energy assessor for a home visit.

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