Under new government plans, opting for a ‘greener’ home could soon become a necessity.
Lenders may have to disclose the EPC rating of their portfolio and may even need to reach an average of band C.
If or when the plans come into force, a low energy performance certificate (EPC) rating will no longer be a nice-to-have benefit for borrowers, but a key attribute for them to secure a mortgage.
Green mortgages have been something of a niche offering for a few years now.
Some high street lenders have offered them as a bonus for borrowers choosing properties with a good EPC rating.
But soon, they could go from being a nice-to-have option to becoming the primary way to finance properties. The advantages of ‘being green’ are about to come to the fore.
The government has been looking to the property market to help achieve its net zero ambitions.
Since it released its Clean Growth Strategy in 2017, it has been encouraging lenders to develop mortgage products that incentivise borrowers to choose properties with a good EPC rating.
The government hopes that these plans will encourage people to make energy efficient upgrades to their properties to increase their value and attract savvy buyers.
Under new considerations, the government will ramp up its green mortgage strategy. It proposes setting a ‘voluntary improvement target’, in which lenders would aim to reach an average EPC rating of C across its portfolio.
As such, lenders may begin prioritising properties that help them to achieve this average, for example, those with an EPC rating of A, B or C.
If the plans come into place, competition between lenders for properties with a low EPC rating will heat up.
As a result, we can expect them to prioritise lending for energy efficient homes.
There are concerns that these plans will significantly disrupt the property market:
Homes could lose value – homes that are not energy efficient could lose value or be more difficult to sell, simply because people cannot secure a mortgage for them (or would need a mortgage with a high rate).
Hits those on the lowest incomes – sellers and/or buyers may be forced to make home improvements, which can be costly. Those who cannot afford to make those changes may be unable to move.
Creates mortgage pensioners – if sellers cannot make energy efficient upgrades (for example, if they live in an old property), they may be stuck with their lender and lose bargaining power to secure a good rate.
A few lenders, including high street names, have been offering green mortgages for some years now.
These include lower-rate products on properties with a good EPC rating (normally A or B). Others provide cashback or additional borrowing for homeowners to make energy efficient improvements.
Some lenders offer green mortgages specifically for new build properties.
Green mortgages aren’t necessarily always cheaper than other products, and savings are believed to be fairly low, but it could be worth incorporating them into your search to expand options for clients. They are also likely to become more competitive if the new legislation comes into force.
Lenders will have their own criteria for required documentation, however, you should expect to show the EPC rating.
As well as demonstrating the property’s estimated carbon emissions, the EPC illustrates how costly the property will be to light and heat.
Not only will this give clients access to green mortgages, but lenders will be able to use the rating to help estimate energy bills, which could increase the customer’s affordability.
Any incentive for a green mortgage will need to be offset by the costs of making improvements (if needed).
It can be difficult to assess exactly how much energy efficient upgrades will cost your clients, as the work needed will depend on the property itself. Having said that, when you have conversations with clients, it can be useful to know some cost benchmarks.
The cost of improving the EPC from D to C by property type is estimated at:
One-bed flat - £3,653
Mid-terrace house - £6,400
Detached family house - £12,540.
It should be noted that Rightmove research found that improving an EPC from D to C can increase the property value by four per cent, which rises to eight per cent for those improved from E to C, and to 16 per cent for those improved from F to C.
Green mortgages are associated with new build properties because these homes tend to carry the best EPC ratings.
Choosing a new build can be cost-effective for buyers because their energy bills should be lower (thanks to their energy efficiency) and they are less likely to need repairs - for the first few years, they should also be under warranty. However, new build properties can come at a premium given that the fixtures are newly fitted.
Getting a mortgage on a new build property can also be more difficult. Some lenders are stricter about how much they are willing to lend, which means that borrowers can be restricted to 85 per cent loans for houses and 75 per cent loans for flats.
Another consideration is the length of the mortgage offer. The typical six months expiry date might not be long enough for new builds, especially those being bought off-plan. You may need to search for lenders that would be willing to extend the offer and/or guide clients through the processes reapplying.
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