How do green mortgages work?
A green mortgage rewards you for buying or owning an energy efficient home. The same rules will apply if you make improvements or renovations to your home with the goal of making it more energy efficient. With green mortgages, lenders or banks will offer preferential terms to a house buyer if they can prove that the property they’re looking at meets certain environmental standards. Homeowners will either get cheaper interest rates on their properties with high energy efficiency ratings, or they’ll be offered cash back incentives to buy energy efficient properties. Some standard mortgages can also become green mortgages, but only if the homeowner commits to making energy efficient improvements. While some green mortgages can be more expensive, the main point of them is to incentivise homeowners to be greener.
Why lenders are offering green mortgages
Energy efficiency is one thing, but there must be a reason why lenders are so interested in offering green mortgages. There is a growing level of evidence to suggest that green buildings and their owners represent a lower overall investment risk for banks. This is because:
- Green buildings typically cost less to run
- Green buildings can have increased value because of improvements
What is an energy performance certificate?
The rating system goes from A to G, with the most energy-efficient homes getting an A rating, and the least getting a G. Between January and March 2022, more than 434,000 new EPC certificates were lodged in England, of which 82% had an energy-efficiency rating A or B.
Older properties typically have worse EPC ratings, with Halifax estimating that just 10% of pre-1900 homes have at C rating or better. Details of a property's EPC rating are normally available online. Use the Gov.uk database if the property you're researching is in England, Wales or Northern Ireland, and the Scottish Register for properties in Scotland. An energy performance certificate (EPC) is a document which indicates how energy efficient a property is. They are required whenever a property is built, bought, or sold, with certificates lasting for 10 years.
What do you need to do to qualify for a green mortgage?
Green mortgages generally fall into two categories:
- Those that reward you for living in an energy-efficient home. Here, if the property you're buying or living in has an EPC rating of A or B, you'll get cashback or a better interest rate on your mortgage. This type of green mortgage is available to homebuyers and, in some cases, re-mortgagers.
- Those that reward you for carrying out 'green' home improvements. Green improvements could include replacing single-glazed windows, upgrading your heating system, or installing solar panels, for example. Typically, lenders will offer you a discounted interest rate or cashback on any money you borrow to upgrade your home's energy efficiency. Lenders are willing to offer incentives of this nature because they increasingly see energy-efficient properties – in this era of combating climate change – as less risky purchases and more likely to hold their value. Plus, if a homeowner is spending less on their energy bills each month, there's less of a chance they'll struggle to meet their mortgage repayments.
We have found very few green mortgage deals offered by high-street lenders that can't be substantially beaten in interest rate by normal, non-green mortgage deals on the wider market. In other words, it's possible to get a cheaper interest rate via a normal mortgage for a property that would otherwise qualify for a green mortgage deal. If you’re interested in a green mortgage but don’t know where to start, get in touch with one of our advisers.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
There is no guarantee that it will be possible to arrange continuous letting of your property, nor that rental income will be sufficient to meet the cost of your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.