Could this be an option for the future?
There is an interesting debate taking place at the moment as to whether property owners should be rewarded with bigger mortgages and lower rates of interest if their property is energy efficient.
A recent study shows that money saved on energy bills, over the typical course of a loan, could equate to £45,000. It also highlights a borrower’s ability to meet loan repayments as part of a reduction in total living costs.
Currently one size fits all
Energy costs are currently taken into account as part of an overall assessment of property outgoings to ensure affordability of a mortgage loan. This is following tighter terms for lending since last year when the Mortgage Market Review (MMR) was introduced.
However, a study by UCL Energy Institute reports that currently there is a “one size fits all” policy which doesn’t take into account buyers who have opted for an energy efficient home, where running costs for electric and gas are significantly less compared to say an old and poorly insulated property.
Costs are calculated based on area, household size and income to work out the total energy spend in a year.
The Green Building Council who co-authored the report suggest “What if energy performance ratings (EPC) were used by mortgage lenders when providing a loan?”
The report uncovered that a new semi detached home could cost as little as £650 to power for a year yet banks would assess it closer to £1,600.
How a green mortgage would work?
An EPC is required for every house sale and rates the property A to G for the best to worse energy performance.
The study analysed the energy usage of over 2,500 homes and found that calculations were by far more accurate when the EPC was factored in.
One side of the argument stands that lenders are loaning too much money to those buying energy-inefficient properties as their outgoings are higher than projected. Similarly, there is potential to lend more funds to those who’s EPC shows costs would be less than the current models used by banks to calculate usage.
“The Government wants lenders to be more responsible, but they’re currently failing to account for the energy costs faced by would-be borrowers.” Richard Griffiths, Green Building Council
By introducing more accurate measures such as an EPC, borrowings and affordability could be assessed case by case to a more accurate level.
Added complications to the mortgage application
On the flip side of the argument, critics of “green mortgages” foresee an opportunity for unfair practice on mortgage applications as well as penalising buyers who are only able to afford to buy properties that are in need of repair and maintenance.
Whilst logically, affordability calculations could be up or down according to the EPC of a property, in reality there are other situations where a borrower would be unable to obtain a mortgage even where they can easily afford the repayments and it would add further scrutiny to an already complex system.
The Financial Conduct Authority (FCA) suggest it would be more appropriate for a bank to be able to base affordability decisions on shopping habits, holiday trends, gym memberships and other lifestyle choices.
Specialist “green” lenders
There are a few specialist lenders who give credit for energy efficiency. The Ecology Building Society, for example, offer 0.25 percent discount from their rates when their EPC goes up a grade. Discounts are also available on loans where energy improvements are being made to the property, such as insulation and double glazing.