In 2019, the UK became the first G7 nation to set itself the ambitious goal of reaching net-zero greenhouse gas emissions by the year 2050. As part of this wider commitment, the government announced a Green Finance Strategy, confirming in July 2019 that a £5 million fund will be made available to help the financial sector develop green home finance products such as green mortgages.
The Energy Efficient Mortgages Action Plan [EeMAP] and the Green Home Finance Innovation Fund [GHFIF] aim to create a green mortgage, which will provide customers with discounted mortgage rates once they have upgraded the energy efficiency of their home or purchased an energy efficient property.
Currently homes are responsible for 15 per cent of the UK’s carbon emissions. The report from the Department for Business, Energy & Industrial Strategy [BEIS] announcing the scheme states that there are 17 million homes in the UK with an Energy Performance Certificate [EPC] rating below band C, suggesting that they are not very energy efficient at all. The average property in the UK is around a band D or E.
As the UK moves toward a net zero economy by 2050, the Green Finance Strategy and green mortgage incentive is intended to entice individuals to improve the energy efficiency of their homes, bringing down this number and tackling domestic emissions, which will be key for the UK to hit its net-zero goal.
This month also saw the introduction of the government’s Green Home Grant which offers homeowners up to 5,000 in vouchers for implementing energy efficient measures into the home. It is expected that more than 600,000 homes in England will be able to take advantage of the scheme.
However, in the eyes of one business leader, there is not enough traction for green mortgage products in the housing finance market and he expects that the Green Homes Grant may not see the uptake that it merits.
Speaking on the Leaders Council podcast, Matthew Fleming-Duffy, director of Bournemouth-based specialist, independent mortgage broker Cherry Mortgage & Finance, sought to discuss the idea of green mortgages being a forward-thinking solution to housing finance and moving towards a more ecological economy, as well as putting the microscope over where housing finance is falling short in this regard.
With the future of the property market uncertain, many people are keen to get onto the property ladder, and new research carried out by Cherry Mortgage & Finance has revealed the extent to which the public understand different mortgage options, as well as how much consumers prioritise sustainability when it comes to their homes.
The research uncovered that attitudes toward sustainability are changing for the better. 57 per cent of respondents indicated that they are making a conscious effort to reduce their waste, with just over half [51 per cent] looking for ways to make their houses more energy efficient and 45 per cent making a conscious effort to reduce their water wastage.
Yet, despite the positive intent, Fleming-Duffy explained that there was little sign of real action being taken in the realm of green finance.
Fleming-Duffy said: “The UK mortgage market is broad and competitive. There are over 100 lenders in the UK and thousands of mortgage products out there, so it is a big ask for any consumer to go out there and get the right product and the right solution that meets their needs.
“There are large numbers of people actively making efforts to help protect the environment, or at least want to as our research showed. But there seems to be a disconnect between wanting to have a positive impact on the planet and converting this into action, particularly in the realm of green finance.
“Only 16 per cent of people on our survey intended to apply for the government’s Green Homes Grant which has come into force this year, possibly due to a lack of awareness or having bad experiences with the government’s previous Green Deal. So, it is marrying these aspects of home ownership, property purchase, mortgage financing, and the extra assessments that are needed to look at making homes more energy efficient and where the funding for it will come from.”
Going into further detail on the government’s Green Homes Grant, Fleming-Duffy explained that although it represents a step in the positive direction, it still falls short in addressing the wider issue of carbon emissions coming from existing housing.
“Government statistics show that 600,000 should be able to take advantage of the Green Homes Grant, but it is only going to go so far. Not everyone will qualify, and more importantly, government statistics show there are 17 million homes in the UK with an Energy Performance Certificate [EPC] below band C, suggesting they are not energy efficient at all.
“The grant will go a certain way to helping some, but there is a problem with inefficient older housing stock that must be retrofitted with energy efficient improvements.”
In Fleming-Duffy’s view, whereas existing green mortgage options are out there for new-build houses, there are minimal options for those people looking for a green mortgage product who are looking to upgrade an existing build.
He said: “Green mortgages have been discussed in the UK for years, more recently concerning some government incentives around developing green mortgage products within the Energy Efficient Mortgages Action Plan and the Green Home Finance Innovation Fund. Green mortgages have also been around in the US for 25 years, but we are yet to see that traction for green finance options in the UK mortgage market.
“I am looking forward to seeing what Lloyds Banking Group, one of the successful bidders for the Green Home Finance Innovation Fund comes up with as a solution, but the market overall is lacking. There are over 100 lenders and there is only one standout product in my opinion which comes from the Saffron Building Society.
“Under the Saffron option, if you were remortgaging your home or buying a home up to 80 per cent of the value of that property, Saffron has a two-year fixed rate at 1.47 per cent. That is a competitive deal in itself, but most importantly if you improve the Energy Performance Certificate rating of your home in six months by at least one band and to at least a Band E, then that rate drops by 0.1 per cent. So, that makes that two-year fixed rate 1.37 per cent, which is pretty much the best two-year fixed rate mortgage on the market at 80 per cent loan-to-value. But, it is subject to those conditions, so if you are a consumer not looking for a two-year fixed rate or you have a different loan-to-value, then it isn’t the best product for you and you would be inclined to look at other options, but other green mortgage options are in short supply. The market is lacking that broader brush approach. We are seeing more and more products starting to appear, but more slowly than we’d hope.”
When asked about how the situation could be improved, Fleming-Duffy suggested that the government could play a role, not in financing green mortgage products necessarily, but in bringing regulators and industry experts together in a move to encourage the UK to become a leader in green finance.
Presenting a three-mechanism idea for this, Fleming-Duffy explained: “There are many ways we could do this. Green mortgage modelling has been around in the US since the mid-1990s, and we could replicate that and have lenders use enhanced affordability calculations in that consumers would have reduced energy costs if they make their home more energy efficient. If you bring in the UK regulator, the Financial Conduct Authority, into these discussions around affordability assessments, it could help more lenders go down this road.
“Secondly, at this time we need to address the fact that making your home more energy efficient is not necessarily recognised as adding any sort of value to the property. This is where we need to be talking to surveyors and estate agents, because there is a focus on short-termism when we look at these values, whereas we need to look at the medium-term and long-term and say that if homes are not energy efficient, household bills are only going to go up. We need to explore as a country what measures we can put in place to potentially penalise properties that are not energy efficient, and these are questions that will be asked more and more as energy bills go up in time, and I think it will eventually have a direct impact on property prices.
“The EPC at the moment does little more than provide an energy efficiency rating, while indicating where a property could be if the consumer invests money into making it more energy efficient. There is no pathway for that to yield an increase in the value of that property in future, though. This could form part of these discussions in future to provide more incentive.”
The third mechanism Fleming-Duffy suggested is the possibility of requiring lenders to set aside less capital against green mortgage options than with regular ones in future.
He said: “There are capital requirements that mortgage providers have to fulfil. This is a positive thing following the financial crisis, but this requirement increases the riskier the mortgage transaction becomes, so a higher loan-to-value transaction commands a larger capital requirement. My suggestion is that we speak to the Bank of England and say that with green mortgages, capital requirements could be reduced. This would lead to a widespread repricing of mortgages, but it allows banks to offer incentives and better priced products for people helping stimulate the green economy, making homes more efficient and helping the government towards its net-zero carbon by 2050 goal.
“If we start bringing these three mechanisms into regulatory discussions, what we will naturally find is that a far broader range of green finance products becomes apparent, open to many if not all people seeking a mortgage. So, one could then go to any lender and look at their standard range of mortgage products, but if they were to commit to making their home more energy efficient, they could find better priced rates and products that could suit them.”
As a model, Fleming-Duffy’s suggestion loosely follows the Barclays method. Barclays is currently the only major bank to offer any form of green mortgage, but these are restricted to newly built properties on a list of the bank’s approved developers, which is where that model falls short.
Fleming-Duffy added: “In my view, it is the older housing stock that needs upgrading to become more energy efficient that poses the real problem. The UK has more than its fair share of glorious older buildings, but they just aren’t energy efficient.”
Despite having mentioned the role that the government can play in providing incentives for the development of green mortgage products, Fleming-Duffy emphasised that lenders can still take the lead on developing them, referring back to the Saffron product.
“It is good that the government is showing a willingness to become involved in this way through the Green Innovation Fund and it is good to begin having more conversations about green mortgage products in this way, but Saffron did not win any government funding, nor do I know for sure whether they even bid for any funding in the first place, and yet they have still created a market-leading, retrofit mortgage product. They did that without any government incentives as a smaller building society, so if they can do it, other lenders should be doing it too. We need this traction of different regulatory principles, encouraging the market to go in a certain direction.”
In the wider context of where the world is at during the present time, Fleming-Duffy believes there is no better time nationally or internationally to force the issue.
“Following the height of the Covid-19 pandemic, so many statistics have shown that the public is supportive of a green economic recovery. A third of people responding to our survey said that Covid had made them think more about their carbon footprint. People are thinking more holistically about what their relationship is with our development as a species and what ought to be done to protect the planet for future generations. It is only right that we start asking questions about what the government and the market can do to help consumers prioritise what they see as important and do the right thing for them.
“The fact that more people are working from home and being in cities and in close proximity to workplaces is now less important for a huge number of people is also feeding into the national psyche. More people are looking at moving out of cities, and looking at data from the property site Rightmove, there was an increase in web traffic of 22 per cent around the time the stamp duty holiday was announced, with more people looking to buy homes in the countryside and by the seaside compared to within cities.”
However, another issue to overcome in achieving a mass roll-out of green mortgages which will capture the national imagination, is being able to dispel unfamiliarity around such products and the inevitable misconceptions which come with that lack of understanding.
Cherry Mortgage & Finance’s research shows that although one in five people stated that they would consider applying for a mortgage where they could receive cash back for home improvements, and one in ten even said they would pay a higher mortgage rate if it would help support a green future, 83 per cent of people do not know what a green mortgage is, and a universal definition is lacking.
Fleming-Duffy highlighted: “Our research in this area threw up some funny results. Seven per cent of people thought that green mortgages were only eligible for people with green doors, and four per cent thought that they were targeted exclusively at vegans. There is no formal definition of a green mortgage, so we are dealing with that issue as a starting point, but if we go back to basics, we need to really make sure that green mortgages cover the retrofit idea of taking an existing home and making it more energy efficient, rather than just applying to new builds.
“We therefore need to talk about insulation, low carbon heating and other measures that can be taken for older housing stock. Green mortgages can be a solution here and we should be clearer about this in how they are defined. In the broader context of where the mortgage market is, if we are encouraging builders to make new homes more energy efficient and enticing the consumer with discounts for buying greener properties, why not also include those who want to retrofit existing builds. A green mortgage should be about buying an energy efficient home and making your home more energy efficient.”
Offering his advice on where people considering applying for a green mortgage could look for more information, Fleming-Duffy stressed the importance of speaking with an intermediary, as opposed to simply using the internet as a port of call.
“I would recommend speaking with a good broker. At the moment, it is of course just the smaller building societies primarily who are offering green mortgage products, but you should always seek out the right advice when looking for a mortgage. The internet can be a curse as much as it can be a blessing, so be wary of some of the advice that is out online and indeed how some of the information can be interpreted. Google is always a good place to start, but I would urge anyone to go out and find an intermediary.”
When asked by Leaders Council interviewer, Scott Challinor, about the steps Cherry Mortgage & Finance are taking as a firm to encourage green mortgages, Fleming-Duffy explained that they had been offering their own version of a green mortgage, with a pledge to plant one tree in the UK for every mortgage arranged, and offset a ton of CO2 through the Portel-Pará Reduced Deforestation project in the Amazon Rainforest.
“We have offered our own green mortgage for a while. We are a small and pretty much carbon neutral firm, and working with a company called Carbon Footprint, we are able to plant a tree in the UK for each mortgage we arrange and offset one ton of CO2. We are fighting the good fight, we hope, in our own way, but there is still much to be done.”