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The idea of green mortgages was one of the most visible parts of the notion that finance and banking could be the lever that forces the UK economy on to the path to net zero. It hasn’t worked out that way. At least, not yet.
Six years (three prime ministers and 10 housing ministers) ago, the government said it wanted to work with lenders to develop products that would capitalise on the lower risk of lending against energy efficient homes, in ways that would encourage borrowers to buy them and improve the standards in the UK’s ageing, leaky housing stock.
The latter is a problem whether your personal preoccupation is the detrimental effect of home heating on the planet or the detrimental effect of high energy bills on household finances. Domestic heating accounts for about 14 per cent of UK emissions, and decarbonising the country’s 29mn homes is estimated to require £250bn in investment. Just 15 per cent of UK homes were built after 1990. Only about two-fifths of homes have an energy performance certificate (EPC) rating of C or above. Depressingly, not all new-build properties even manage to hit that mark.
The impact of green mortgages is currently underwhelming. The market has grown from four products in 2019 to 60 today from 38 different lenders, according to the Green Finance Institute. But the overall market remains tiny: consultancy Baringa reckons that green mortgages amount to £8.1bn or 0.4 per cent of total lending.
What’s on offer is mainly products that offer a sliver of a discount on the mortgage rate, or a cashback payment, to those buying homes defined as green. There are two problems here. First, the discounts on offer — barely 0.1 percentage points, or perhaps £10 a month on a £200,000 loan — are too small to change decision-making, particularly over the course of a short fixed rate period. Green deals can often be beaten by bog standard offers from other banks. Second, the market is dominated by products that are available only to homes that are already energy efficient, restricted to A or B rated properties, new builds, or both.
This, at the margin, helps greenify a bank’s balance sheet, one concern for the sector after the government in 2021 proposed (but hasn’t followed through on) setting lenders a voluntary 2030 target of having an average C rating in their portfolios. But it doesn’t do anything to improve the efficiency of British homes. Insulation rates are down 90 per cent compared with 2012, before David Cameron (remember him?) opted to “cut the green crap” and scrapped various policies around improving standards.
There are some signs of innovation coming through. Nationwide is offering zero per cent finance to mortgage customers for up to £15,000 for work to improve home efficiency, in part to gauge underlying demand among homeowners. Leeds Building Society is incorporating savings on energy bills into affordability assessments, boosting how much would-be buyers can borrow. Perenna Bank, a new lender focused on long-term fixed rate mortgages, won a government green finance grant to develop a product to encourage retrofitting: It thinks a discount of 0.2 to 0.3 percentage points over the life of a multi-decade mortgage will prove persuasive to borrowers.
But generally, the benefits of better energy efficiency on property values or on credit risk thanks to lower bills aren’t really being factored into pricing. Nor are the policies in place to push lenders to do more — or, crucially, to make it easy for borrowers to figure out what to do with their homes, and get work carried out.
Continued prevarication over heat pumps versus hydrogen in home heating hardly helps. Nor does the mixed messaging from the government, which in September scrapped deadlines for landlords to improve the energy efficiency of rental properties. “Banks aren’t seeing strong demand for green home products, because there isn’t the right policy and regulatory environment to encourage people to think about retrofitting their homes,” said Emily Farrimond, partner at Baringa.
In a market where only a quarter of English households own with a mortgage, the power of finance to overhaul the UK’s dismal recent record on home efficiency was always limited. It will take both better policy and better products to fulfil even that potential.