Green mortgage market – what are the key trends?

The green mortgage market is in the spotlight, with the government seeking to lower the UK’s carbon footprint by boosting the energy efficiency of homes.

There has been significant attention on proposed regulation changes stating that by 2025, newly rented properties must obtain an Energy Performance Certificate (EPC) rating of at least ‘C’, with existing tenancies having until 2028 to comply.

As such, Mortgage Introducer has sought to uncover trends, challenges and expectations in the green mortgage market.

Green mortgage market trends – retrofitting properties

Luke Loveridge (pictured), founder of Propflo, a platform that supports lenders to decarbonise with AI powered analysis and impact monitoring, said retrofitting is on the rise.

“Lenders are talking more about retrofit mortgages and energy efficiency home improvement products that will incentivise people to improve their homes, rather than only securing new customers who already have an ‘A’, ‘B’ or ‘C’ energy-rated property,” he said.

Loveridge added that both are needed, but if a property is a ‘G’ and can only get to a ‘D’, he said there are fewer products available for the homeowner even though the improvement is significant compared to getting from a ‘D’ to a ‘C’.

“With David Geale, director of retail banking at the FCA, stating in April that lenders should not inadvertently be making properties unmortgage-able through green mortgages, these retrofit and home improvement products could become more prominent,” Loveridge said.

Geale also said that the FCA will be monitoring the delivery of lenders’ decarbonisation targets and will not hesitate to take action if needed.

With mortgages typically making up over 90% of a lender’s carbon emissions, Loveridge said we are going to see increased focus on incentivising and supporting homeowners with retrofitting their properties. Amid rising interest rates, he said something like a government-backed ‘Help to Retrofit’ scheme is needed to make sure there is always a market leading green product.

Green mortgage market challenges

“It is important to bear in mind that green mortgages rely on EPC ratings - there has been lot of unnecessary ‘EPC bashing’ recently, but the current set up is certainly not perfect,” Loveridge said.

Loveridge said producing an EPC rating for a property is somewhat dependent on the energy assessor, who has three days of training, so quality might vary.

“Gas is also favoured as electricity is currently more expensive which does not help decarbonisation of heating,” Loveridge said.

Despite this troubling setup, Loveridge questioned what the alternative is to assess the EPC rating of a property.

“Digital tools usually require a lot of input from the owner, which would significantly increase drop-off rates, and more extensive in-home assessment would add substantial cost, alongside there not being many of these assessors,” he said.

Lastly, Loveridge said verification and impact monitoring is another challenge, and added that there are several companies already offering smart meter and in-home data to validate retrofit works.

Expectations for green mortgages

In 2023, Loveridge expects there to be more experimentation with green, especially retrofit, mortgages, and other financial products to incentivise people making their homes more energy efficient.

“Nationwide recently launched a 0% green additional borrowing product, for example, but read the fine print and you will find it was limited to the first 5,000 customers,” he said. As such, Loveridge said this was really a research exercise to benchmark uptake, understand barriers, and inform product development in future.

The government has also stated that the new Minimum Energy Efficiency Standards (MEES) will be confirmed by the end of this year.

“Currently proposals are that newly rented properties must meet an energy rating of ‘C’ by 2025, with existing tenancies having till 2028 to do so or be fined; a landlord will be liable for the first £10,000 of works, but there are some exemptions,” Loveridge said. He believes lenders will want to offer support to landlords to retrofit their properties to be compliant.

While Loveridge said it is a risk for the lenders’ back-book, he believes it is also an opportunity for them to add value to their existing customers as well as to gain market share.

What trends are you currently seeing within the green mortgage market? Let us know in the comment section below.