We’re all trying to keep our energy bills down, but millions of us don’t realise we could be cutting mortgage payments at the same time, potentially saving hundreds of pounds a year by switching to a “green” mortgage.
This mortgage type is available to energy efficient homes (which typically means an Energy Performance Certificate rating of A or B, the two most efficient grades) and charges a lower interest rate than a typical mortgage – in large part because the home is cheaper to run, so the owners are less likely to default on their repayments, making them a safer bet for the lender.
If a rating hasn’t been done since the scheme was introduced in 2007, a qualified assessor can come round and do one at a cost of around £40 to £120.
The number of green mortgage products in the UK has soared from just four in 2019 to more than 90 today, according to the Green Finance Institute, which was set up by the government and the City of London to help develop the sector.
It estimates that by last year, green mortgages had grown to account for 5 to 8 per cent of new mortgages.
But despite their increasing popularity, Green Finance Institute director Ryan Jude told me there are likely to be millions of homeowners and homebuyers who could qualify for a green mortgage but may not know these products exist.
While savings will vary considerably depending on factors such as the size of the mortgage and deposit and the financial circumstances of the borrower, he gave me an illustrative example of the kind of savings on offer for a green mortgage with an interest rate that is 0.2 percentage points below an equivalent standard mortgage (most green mortgages are between 0.1 and 0.3 percentage points lower).
He calculated that for a homeowner borrowing £250,000 over 25 years on a two-year fixed rate a household could reduce repayments by roughly £29 per month, which amounts to just under £700 in just two years.
An energy efficient home can not only reduce your mortgage payments and your bills – it also increases the value of your property. Rightmove’s Greener Homes Report found that moving from an EPC rating of D to C could add around 3 per cent to a home’s value. With an average house price in the UK of around £300,000, that amounts to £9,000.
If you have an energy efficient home but have already taken out a standard mortgage you can take advantage of a lower-rate green mortgage by switching at the end of your current term when your mortgage comes up for renewal, either with your existing lender or a new one. And you may potentially do this sooner if the penalties for switching early aren’t prohibitively high.
Alternatively, if you improve the energy efficiency of your home while living there (however that is financed) you may be able to effectively recoup some of that cost by switching to a cheaper green mortgage when the work is done.
But, while they might make good financial sense in the longer term, many households simply cannot afford the upfront costs of these measures – with a typical heat pump, solar panel and home battery package costing in the region of £20,000.
Most households are eligible for a £7,500 heat pump grant (bringing the cost down from around £12,500 to £5,000). And there are grants available to lower-income homeowners for solar panels, batteries, and insulation as part of the government’s £15bn Warm Homes Plan.
But for many homeowners, most measures they might take to improve energy efficiency remain out of reach.
Green mortgages may also be able to help here. You may have to pay the standard rate, but if you agree to install energy saving measures such as solar panels and insulation that will improve the EPC rating, some lenders will let you borrow more money to finance the installations as part of a wider green mortgage financing package. And some, like Nationwide, are offering zero percent interest on those loans.
Again, there is a low level of awareness about these kinds of green loans, with only 17 per cent of homeowners currently aware that they may be able to borrow from their existing lender to fund energy-efficiency improvements, according to the Energy Security and Net Zero Committee.
The mystery which remains is why green mortgages are still such a niche product with so little public uptake, given the advantages they can give homeowners. If the government is serious about making sure our homes are cheaper and easier to heat, then it – and lenders too – have to do more to make sure people know about it.
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