Green Mortgages | What You Need to Know
A green mortgage is a type of home loan. It’s aimed at providing borrowers with benefits for buying or re-mortgaging that are deemed energy-efficient or to help homeowners pay for energy-efficiency improvements.
The idea behind green mortgages is to encourage us to make our homes more environmentally friendly. This can also lead to reduced energy consumption and therefore bills. Let’s take a closer look.
What is a green mortgage?
Green mortgage products are designed to encourage us to be environmentally friendly. They ‘reward’ you for saving energy at home and as such offer buyers of energy-efficient homes favourable terms which vary from lender to lender.
For example, some may offer a discounted mortgage interest rate based on an improvement in your home’s EPC rating.
New build homes are typically more energy-efficient so you may stand more of a chance of securing one.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Why are mortgages going green?
The two most significant outgoings for most home buyers and homeowners are the monthly mortgage payment and monthly energy bills.
The Bank of England base rate, on which many mortgage interest rates are based, has been at a high 5.25 per cent for almost six months. A typical household using gas and electricity and paying by Direct Debit is now estimated to be spending a hefty £1,928 per year.
So perhaps unsurprisingly there’s a new range of loans emerging from lenders attempting to address both of these worries – ‘green mortgages’.
They started in earnest in 2019. However new research suggests that as of January 2024, some 57 per cent of lenders already have at least one green mortgage product available.
A single principle
There is no definitive green mortgage, but the general principle is they give preferential rates and/or cashback to borrowers whose homes are the most energy-efficient. Some lenders also offer larger loans to buyers of highly energy-efficient properties.
Green mortgage examples
In 2023 Nationwide launched a zero per cent loan for existing mortgage customers to fund energy-efficient home improvements.
The NatWest opened an advice hub telling borrowers what improvements might entitle them to a green mortgage.
The Halifax offered up to £1,000 cashback to green mortgage borrowers installing certain approved features like a heat pump.
Why do we need these type of mortgages?
It’s well known that the UK has some of the oldest, least energy-efficient housing stock in Europe. Some 60 per cent of homes have EPCs rated D or below but many improvements – like solar panels, heat pumps, new boilers, and more effective insulation – involve big outlays and take some years to pay back that cost through reduced energy bills.
So green mortgages are an incentive to buy homes with EPCs rated A, B or C, or to improve an older less-efficient property to improve its rating from D or below.
How do green mortgages work?
For the borrower, there’s nothing fundamentally different about a green mortgage. You’ll need to meet certain criteria to secure the loan. You will then be charged interest and must make monthly repayments.
However, it may have more favourable rates than a standard mortgage from the same provider. It’s worth remembering that this does not mean that your chosen provider cannot be beaten on price by a rival lender.
We can connect you with our approved mortgage adviser who can explore your green mortgage options and find the right deal based on your circumstances.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Who can get a green mortgage?
Currently, most lenders with green products, have taken the easy route and apply these types of loans to buying new-build homes.
However, select lenders are providing green remortgage options or similar loans. This enables homeowners of older properties to secure a new loan dedicated to enhancing energy efficiency. This is to boost the home’s energy rating, potentially leading to more favourable repayment terms moving forward.
Who can apply?
The answer is anyone – a first-time buyer, an existing owner or someone remortgaging.
Using a mortgage broker is usually the best way to find the most appropriate deal for your circumstances and budget.
Your home may be repossessed if you do not keep up repayments on your mortgage.
How do you qualify for a green mortgage?
Qualifying for a green mortgage involves meeting certain standards or so-called conditions that are set by lenders. Generally speaking, each lender will have their terms and conditions when it comes to green mortgages, such as maximum loan to values (LTVs).
Often this includes having a property that meets a certain level of energy efficiency. Usually, this must fall within the A or B bands of an Energy Performance Certificate. Next to this, the standard mortgage application requirements will apply as usual.
Bear in mind the other rules of applying for a mortgage also apply. You’ll need:
- Proof of income/employment.
- Proof of ingoings’ & outgoings.
- A good credit report.
However, if you’re buying a new build, you should receive a Predicted Energy Assessment. The Predicted Energy Assessment is done to provide you with a predicted energy rating. Lenders will likely ask to see this to ensure you qualify for a green mortgage.
Why do lenders offer green mortgages?
When pricing a loan, a lender will have to carefully weigh up risk. So, lenders offer lower rates for green mortgages as they consider them lower risk, because:
- Generally speaking, ‘green’ properties have more value. Even if the property market dips, green properties have ‘green value’. And are considered attractive and likely to hold their value.
- They’re cheaper to run; your utility bills will likely be lower. This means you’re less likely to fall behind on your mortgage repayments.
You could also lower your carbon footprint by switching energy suppliers. For example, choose one backed by renewable energy.
The downsides to green mortgages
Not all green mortgages are necessarily cheaper, even if you factor in interest rate discounts.
This could be an issue if cost is your main priority, as it is for many. Speak to a mortgage adviser who can look at the options available to you and can compare green mortgages to suit your circumstances, don’t just go with the first deal you see.
Use a mortgage calculator to work out what you can afford. Factor in not just monthly repayments, but moving fees and other outgoings, such as bills.
Suppose you’re one of the growing numbers of climate-conscious buyers also concerned with improving the energy efficiency of your current or next home. The consideration of a green mortgage is one to add to the mix of options.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Last Updated: November 1st, 2024
