June 6, 2022
Matthew Fairy

What is a Green Mortgage?

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Is A Green Mortgage Right For You? 

Save money and help the planet at the same time

There are more choices than ever when it comes to green mortgages. This type of mortgage offers lower interest rates or extra capital and raises awareness of the importance of energy efficiency amongst lenders and buyers. There is an increasing number of lenders offering green mortgages and a large proportion of these now offer homeowners discounted interest rates for purchasing homes that are already energy efficient.

There can be confusion regarding what a green mortgage is. It is not a loan backed by environmentally friendly funds or where profits are invested in sustainability or renewable energy. The green aspect of this type of mortgage in fact refers to the element that helps improve a home’s energy efficiency rating.

3 Different Types of Green Mortgages

  • For homes with high energy efficiency ratings there are cheaper lending rates.
  • Capital release to fund improvements to a properties energy efficiency using credit, discounted mortgage rates or cashback on an existing mortgage.
  • Additional borrowing for home energy efficiency improvements made available through re-mortgaging or moving to a new property that could benefit from energy efficiency work.

Reducing your Home’s Carbon Footprint

Green mortgages share the ultimate aim of reducing a home’s carbon footprint and helping homeowners recoup their investment by making savings on energy bills. By having a good energy performance certificate (EPC) rating for your home, it could help increase the value of your property as these ratings indicate lower running costs.

As part of the Paris Agreement signed by the UK and many other countries, we committed to limiting global warming to 1.5°C and reach net zero emissions by 2050 (with Scotland aiming for 2045). A vital part of this journey is to decarbonise the UK’s housing by making it more energy efficient.

Energy Efficiency Ratings

All homes in the UK are required to have an up-to-date EPC when they are rented or sold. Energy efficiency ratings range from A to G, with ‘A’ being the most energy efficient and ‘G’ the least. Generally, newer homes receive high ‘A’ to ‘B’ ratings, while older and more historic homes receive much lower ratings.

Why are Energy Efficiency Ratings Important?

When looking at mortgages, household spending forms part of the lender’s calculation. Energy bills come under household spending and most lenders factor a standard energy bill as 4.4%[1] of a household’s total expenditure. This can sometimes be inaccurate as for example, a ‘G’ rated property with a family of 4 living in it would be assumed to spend £200 a month on energy bills. This monthly figure then drops to £50 a month if their property was ‘A’ rated.

Green mortgages look at a properties EPC rating and the impact of this rating on energy expenditure. What this means is that people buying ‘A’ or ‘B’ rated houses may in fact be able to  borrow more as they will be spending less on energy.

Improving Energy Efficiency to Lower Repayment Rates

Studies by the Energy Saving Trust suggest that if you improve a home’s energy efficiency rating by 2 bands this could equate to adding up to £4,000 in additional mortgage finance due to the savings you will be making on monthly energy bills. This money can then be used to fund home improvements.

There are 2 different ways lenders suggest this can be implemented with the discount being applied once the work has been completed, or a certain percentage of released funds spent on energy efficiency measures. There are some restrictions attached to this as some lenders require work completed to bring the property within a specific EPC rating.

Implementing Energy Efficiency Measures

If you are considering implementing energy efficiency measures in your home it’s vital you do your research. Your green mortgage lender will not advise you on this. It’s always important to install energy efficiency measures that meet the needs of the building and to implement them in the right order. As an example, heat pumps are a great option and work particularly well in well-insulated houses.

Rented Properties  

Private sector landlords are also required to improve their property or portfolio of properties energy efficiency ratings. All properties to let should now meet at least an ‘E’ band.

As the need for green mortgages grows significantly, it’s worth finding out whether this type of mortgage could benefit you. Contact Transparent Mortgage Services for more information on 01424 444 597.

Source data: [1] Energy Saving Trust, July 2021

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