As we sit in our houses and offices, coping with temperatures the UK is hardly equipped for, minds are turning to the issue of climate change more than ever before.
Every sector has a role to play in addressing environmental issues, but the UK housing market is particularly important.
According to the Climate Change Committee’s Sixth Carbon Budget, direct greenhouse gas emissions from buildings – namely the burning of fossil fuels for heating – accounted for 17% of the UK’s total in 2019.
In the meantime, buildings were responsible for 59% of UK electricity consumption, leading to indirect emissions at about a third of the level of direct emissions. While this does encapsulate commercial and public buildings, homes make up a considerable 77% of the total.
It might be a surprise, then, to find that Smart Money People’s Mortgage Lender Benchmark for H1 2022 found that 78% of brokers are not seeing demand for green mortgages among their clients, with only 11.6% actively seeing this demand.
More than 650 brokers shared their views on 99 lenders, the strengths and weaknesses of the market, and what improvements might be needed for the future.
The results around green mortgages speak to a basic disconnect, where those products meant to incentivise environmentally friendly transactions and improvements – of which there are an increasing number these days – largely fail to take into account the reality of the current housing market in the UK, and therefore fall short of capturing the interest of borrowers.
Theory versus practice
The feedback we’ve received from brokers in the process of conducting our research shows a general agreement that green mortgages are a good idea in theory.
Few would dispute the use of financial incentives to instigate positive social or environmental changes. To this end, incentives – such as better rates or cashback – for those deals that create more sustainable housing have created quite a positive buzz.
However, this buzz fades somewhat when people take a closer look at the practical realities of what’s on offer. Lenders who promote mortgages as being green, but don’t fit with the reality of their borrowers’ situations, run the risk of it seeming like a gimmick to gain favour, rather than a clear commitment to change.
For example, many lenders’ criteria are seen by brokers as too restrictive to make meaningful change. In the UK, with its overwhelming stock of older housing, lenders asking for an Energy Performance Certificate (EPC) of A or B, when the legal requirement for rented properties doesn’t go past Band C, means that only new-build properties are likely to be eligible – in turn, new-builds might not have a rating until a late point in the process, adding further confusion and complication.
Brokers also point to the expense of raising a property’s EPC, which currently is not matched by the incentive rates on offer. In order to have a serious impact, borrowers need to be drawn to make environmentally friendly choices with rates or incentives that are starkly different from what can be achieved with a standard mainstream mortgage.
One suggestion by brokers for improving green mortgages is to focus on incentivising borrowers to improve their EPC, rather than simply rewarding those who approach the lender with an already high rating.
This is not a new idea, but currently is only available among a relatively small number of lenders. Encouraging more lenders to incentivise improvements might better address the need to update the large amount of existing housing stock, rather than simply encouraging those looking for green incentives to grapple over the comparatively small store of new-build housing.
Another option suggested by brokers is the introduction of staged green rates, providing flexible reductions as and when the borrower is able to improve their EPC rating, which takes into account the realities of time, effort and cost that go into making these changes.
Above and beyond
Currently, broker sentiment shows there is little drive to go above and beyond government minimums when it comes to energy efficiency, as the cost is high in comparison to the practical pay-offs, if there are any.
Of course, we should all be looking to do our part to combat climate change simply for its own sake, and for that of future generations. However, the weight of this cannot solely fall on individual pockets.
We cannot ask landlords and residential homeowners – already being hit in various ways by inflated rates, increased taxation and regulation, and skyrocketing house prices – to sacrifice their increasingly thin margins.
Instead, the market as a whole must listen to brokers and borrowers, and using their insights, work to create a greener future for property finance.
Jacqueline Dewey is CEO at Smart Money PeopleÂ
