Have you heard of Green Mortgages?
Perhaps not, given the low take up and market share these products currently have - particularly in the UK.
The launch of mainstream green mortgages back in 2018 was seen as a pivotal step in steering the UK economy towards net-zero emissions.
However, the journey thus far has been less impactful than anticipated.
The Initial Promise of Green Mortgages
Green mortgages, designed to reward energy-efficient homes with favourable loan terms, were expected to revolutionise the UK's housing market. The government's ambition, almost six years ago, was to work with lenders to develop products that capitalise on the lower risk associated with energy-efficient homes. This initiative aimed to encourage the purchase of such homes as well as improve the standards of the UK’s ageing and inefficient housing stock.
As background, 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 greenhouse gas emissions, and decarbonising the country’s 29m homes is estimated to require £250bn in investment. As further background, just 15 per cent of UK homes were built after 1990 - while a whopping 40% were built before 1945 - before the concepts of decent insulation or double glazing even existed. Indeed, today, only about two-fifths of UK homes have an energy performance certificate (EPC) rating of C or above. Depressingly, not all new-build properties even manage to hit that mark - with ONS data suggesting only around 86% of new builds get a C or above. The Government has set targets of all new builds getting A-rated EPCs by 2025, by way of reference.
The Current State of Green Mortgages
Despite the growth of the green mortgage market from four products in 2019 to 60 today, the impact of these products - shown in their uptake - remains underwhelming.
Green mortgages constitute only 0.4% of total lending, with a value of £8.1bn. The offerings primarily include slight discounts on mortgage rates (a few pounds off a standard mortgage monthly rate) or cashback for purchasing energy-efficient homes. However, these incentives are often too minimal to influence decision-making, and the market predominantly caters to homes that are already energy-efficient, limiting its reach.
Challenges in Market Implementation
- Inadequate Incentives: The discounts offered are often insufficient to sway buyer decisions, especially when compared to standard mortgage deals from other banks. Put simply, the reward for taking out a green mortgage isn’t enough - with buyers focussing more on long-term rate security or staying with existing lenders rather than face the hassle of switching provider.
- Limited Scope: The focus on already energy-efficient properties does little to enhance the overall efficiency of the UK's housing stock. This is a problem as it fails to deliver on the original promise - to help transition UK housing stock towards better energy efficiency through financial ‘carrots’.
- Lack of real market competition: Lenders benchmark their rates against each other - naturally. But without support of some kind (and here we are looking at the need for Government legislation to ‘sweeten’ the benefits of lower interest rate green lending) there’s precious little incentives for banks and building societies to start a ‘race to the bottom’ around offers.
- Wider legislative flip-flopping: The UK government's recent approach to green legislation has been characterised by inconsistency, undermining efforts towards a sustainable, low-carbon economy. For instance, the oscillating stance on heat pumps versus hydrogen for home heating and the recent reversal of deadlines for landlords to improve rental property energy efficiency. These shifts create market uncertainty and weaken confidence in the government's environmental agenda.
Furthermore, the wavering commitment to net-zero legislation adds to the confusion. While the government initially pledged robust action towards achieving net-zero emissions, subsequent policy changes and delays signal a lack of firm resolve. This back-and-forth not only impedes progress in key areas like housing and energy but also discourages investment and innovation in green technologies, essential for a successful transition to a greener future.
Emerging Innovations and Limitations
Some lenders like Nationwide and Leeds Building Society are experimenting with innovative approaches, such as zero percent financing for energy-efficiency improvements and considering energy bill savings in loan affordability assessments. However, these initiatives are still in their infancy, and the overall effect on enhancing energy efficiency in British homes remains limited.
The Need for Better Policy and Products
The success of green mortgages is hindered by an unclear policy and regulatory environment. This uncertainty affects consumer interest in retrofitting homes and the demand for green mortgage products. Furthermore, the market's limited scope means that its potential impact on overall home efficiency in the UK is constrained. Effective change will require a combination of improved policies and more compelling product offerings.
Switch2Zero CEO Ian Ormerod, said: “Green mortgages, while a promising concept, face significant challenges in the current market.
“For these financial products to reach their full potential in driving the UK toward net-zero emissions, a concerted effort in policy-making - led by the Government and underpinned by legislation and regulatory support - product innovation from financial institutions, and consumer education is essential.
“Only through a holistic approach that addresses these multifaceted challenges can green mortgages truly transform the housing market towards greater energy efficiency and environmental sustainability.
“There’s a huge - and really impactful opportunity here - but we just need some robust, and consistent, leadership across the whole mortgage ecosystem if we are to see the change we need.”
