Why green mortgages are a growth area
There’s been a rising number of ‘green’ mortgage products available this year, both in the residential and buy-to-let space.
These are loans for those buying properties with a good EPC (Energy Performance Certificate) rating, while they are typically offered at a better rate than lenders’ equivalent products.
They have technically been around since 2006, but they attracted more attention in 2018 when Barclays decided to enter the market.
Reaction was modest, but over the course of 2020 and 2021 the list of names following Barclays with a green product of their own became extensive.
Landlords can also now take out green mortgages for investment properties from The Mortgage Works, Landbay, Bank of Ireland, Paragon and Foundation Home Loans
What’s the appeal of green mortgages?
Lenders can justify offering lower rate mortgages for those with energy-efficient homes, as your bills are likely to be lower.
They are also responding to government policy, as The Department for Business, Energy and Industrial Strategy has talked up the prospect of mortgage lenders playing a key role in the government hitting its green targets.
The UK wants to bring all homes to an EPC rating of C as part of the government’s Clean Growth Strategy.
What is more, there are proposals being discussed which would make the minimum EPC rating C for all new tenancies by 2025, and for all existing tenancies by 2028.
If those rules came into force today that would be problematic for lenders, who wouldn’t be able to lend to investors with energy-inefficient properties, because landlords wouldn’t be able to let them out.
Given the proposals, landlords could put more focus on improving the green credentials of their properties in the years ahead, so lenders are launching products to meet that demand.
Rightmove analysis of over 15 million homes across England and Wales found that 59% of homes had a D, E, F or G rating in June 2021 – so the UK clearly has a lot of work to do to improve the state of its housing stock.
As you might expect, green mortgages tend to be competitive in terms of rate.
In June 2021 NatWest launched a green mortgage with a rate of just 1.01% to 60% LTV with a £995 product fee and £250 cashback. This is available to those with an EPC rating of A or B.
While green products are usually only marginally cheaper than other products, more competition could drive the rewards up for green customers now that so many lenders are involved.
Virgin Money has a niche of its own, as it offers green shared ownership mortgage products for homes with an A or B rating.
On launch in May 2021, the products were available to 85% loan-to-value and included a two-year fixed with a rate of 2.28% and a five-year fixed at 2.63%, both with a £995 fee.
There are also green mortgages available which sit on top of your existing mortgage, effectively enabling you to make green home improvements on the cheap.
TSB and Nationwide both have products of this ilk, with the latter offering a rate of just 0.75% for loans between £5,000 and £25,000.
At least half of the loan must be used to fund a range of sustainable home improvements, including solar panels, air source heat pumps and electric car charging points.
Meanwhile Nationwide is offering a £500 cashback incentive for those buying a property with an EPC score above 92.
The Mortgage Works has a buy-to-let mortgage designed for those with a property above a C EPC rating.
This is available up to 80% LTV and includes a two-year fixed rate at 2.49% and a five-year fix at 2.99%, both with a 2% fee.
Bank of Ireland is looking to compete on price, as it offers a 2-year fix at 1.71% to 60% LTV with a £995 fee, and a 5-year fix at 2.29% to 75% LTV with a £1,495 fee, with £250 cashback.
Foundation Home Loans has launched a green range where its products get progressively cheaper as you move from an EPC rating of C to A. Rates start from 1.99% for A rated properties, with a 2% product fee.
Finally specialist lender Landbay, known for its support of limited company buy-to-let, offers green buy-to-let products between 0.10% and 0.05% cheaper than its equivalent.
Green mortgages are a growth area due to a combination of government pressures and rising demand, as there’s a growing recognition that it’s worth it to improve a home’s EPC rating.
According to Rated People more than half (57%) of UK residents want to find ways to be more eco-friendly in the future, so people are looking to do their bit.
Indeed, having an efficient home saves on energy bills and helps the planet in one fell swoop.
And with landlords being threatened by these new tenancy proposals, there’s an extra incentive to improve their properties.
Thankfully there’s been a big response from lenders in the past year, so as a buyer you have lots of options if you want a green mortgage.