Market review

Green demand is set to grow

Lee Chiswell

head of secured borrowing, Barclays

The green mortgage market has generated plenty of column inches over the course of 2022, and this increased awareness is vital for a sector that is still in its relative infancy.

Green mortgages represent an important component within a wider green revolution, a revolution that includes the reduction of greenhouse-gas emissions and the path to net zero.

Barclays was one of the first banks to announce its ambition to be a net-zero bank by 2050. As a lender, since 2018, we have facilitated £74bn in green financing. This includes landmark projects such as supporting the UK government in issuing its first green bond, which will finance projects such as offshore wind and schemes to decarbonise homes and buildings.

In April 2018, we became one of the first major UK lenders to offer a product that rewards buyers for purchasing an energy-efficient home, and in January 2022, we launched our first green BTL mortgage products.

At this juncture, it’s prudent to focus on energy-efficiency levels and EPC ratings currently being delivered by housing stock across England and Wales, as this will help highlight some of the differing challenges, and potential costs involved, in upgrading certain properties.

Helpfully, the ONS have just published their latest report on the energy efficiency of housing in England and Wales for 2022. While not every dwelling has an EPC rating, and thus the report does not cover all housing stock, it can still provide useful insights. Let’s look at this performance by region, property type, and property age.

ENERGY EFFICIENCY BY REGION

The ONS data outlined that housing stock across England and Wales varies, and this is reflected in median energyefficiency scores.

The median energy-efficiency score was 67 in England and 65 in Wales for all records up to March 2022, which are equivalent to EPC band D. Within England, Yorkshire and the Humber had the lowest average score (65, equivalent to EPC band D). London and the South East had the highest median energy efficiency out of all English regions, with a score of 68 (EPC band D).

ENERGY EFFICIENCY BY PROPERTY TYPE

Overall, the ONS found that flats and maisonettes were the most energy-efficient property type in both England and Wales, with a median energy efficiency score of 72 in England and 73 in Wales, both of which are equivalent to EPC band C. Detached and terraced dwellings scored the lowest in Wales (both 63), while in England, semi-detached properties (64) were the lowest. Both of these scores are equivalent to EPC band D.

The ONS noted that this may be a result of external wall exposure being higher in detached properties compared with flats and maisonettes, which are more likely to be grouped in blocks. It added that while there is a wide difference in energy efficiency between flats and houses, there is only a small difference among the different types of houses.

ENERGY EFFICIENCY BY PROPERTY AGE

It’s the view of the ONS that the age of a dwelling affects its energy efficiency, as building techniques and regulations have changed over time, and older buildings have simply undergone more wear and tear. For example, properties built post-1920 are more likely to have a cavity wall that is easier to insulate, and newer properties are more likely to have double glazing.

Dwellings in both England and Wales constructed after 2012 were reported to have a median energy efficiency score of 83, which is equivalent to EPC band B. In contrast, dwellings constructed before 1930 had a median score of 59 in England and 57 in Wales, equivalent to EPC band E.

The ONS observed that the proportion of older dwellings can differ across areas, which can influence energy-efficiency median scores. For instance, in the EPC records analysed, Wales had a higher proportion (33 per cent) of older dwellings (built pre-1930) than England (23 per cent). They note that this may have had an impact on national medians.

This latest report from the ONS makes for some interesting reading, and for those looking to purchase property, whether for residential or BTL purposes, conversations and actions are more likely to be taken with EPC ratings in mind, especially in light of rising energy costs.

As awareness grows around more energy-efficient choices within our homes and property investments, we think that client demand for green mortgage products is likely to rise, as will reliance on the advice process to ensure that a range of borrowers have access to such options.

This means that the intermediary market will continue to play a central role in educating clients on the potential benefits attached to green mortgages, greater energy efficiency within the home, EPCs, retrofitting, and other factors that can benefit a range of borrowers over the longer and shorter term. And lenders who are committed to the growth of the green mortgage market can support their intermediary partners by delivering solutions that help meet client demand. M I

References: https://www.ons.gov.uk peoplepopulationandcommunity/housing/articles/nergyefficiencyofhousinginenglandandwales/2022

Cometh the hour…

Stuart Miller

board member / chief customer officer, Newcastle Building Society

The economic and political situation that has unfolded this autumn is rather more than anyone could have predicted, and certainly more than anyone wants. Swap rates are up, and mortgage rates have consequently followed. The Bank of England has been crystal-clear that base rates will continue to rise. Energy prices are crippling household and business finances alike, and Westminster’s revolving doors have meant fiscal policy has been anything but consistent.

But thinking about what’s in store for our market in the coming months and years has made me consider the importance of perspective. Looked at through the lens of the media, things are moving at the speed of light, politicians are panicking, markets are twitchy – and many homeowners are facing an uncertain future.

Amidst all the limelight-grabbing political and economic turmoil, other market news can sometimes be obscured. Too little attention has been given to what lenders will do when customers struggle.

In June, the Financial Conduct Authority (FCA) wrote to lenders’ chief executives stating their expectations as the cost of living hits borrowers. The FCA measures mandate that lenders must deliver an appropriate level of care and support. The level of care needed by customers who have characteristics of vulnerability may be different from that needed by others, and lenders should take particular care to ensure they are treated fairly.

Lenders should give borrowers in financial difficulty appropriate, tailored forbearance that is in their best interests and takes account of their individual circumstances. They should support borrowers showing signs of financial difficulty or struggling with debt by making them aware of and helping them access money guidance or free debt advice. The FCA also ought to ensure that any fees and charges levied on borrowers in financial difficulty would be fair and do no more than cover costs.

The requirements are not exhaustive (there was also instruction on helping consumers avoid falling victim to scams or illegal moneylending in a time of financial distress), but the measures were quickly followed by a further missive from the Bank of England, which issued unequivocal guidance in July that lenders should shore up capital buffers – advice that all lenders took. Cash reserves are higher than they have been for a decade.

Every financial crisis is different, and the one we find ourselves in currently will largely play out differently from any before – regardless of political policy. It is certain that some, indeed many, borrowers are going to suffer in the coming months. But I think it is also certain that lenders are not about to embark on a journey of issuing possession orders on them as a result. Tough decisions will face many – though let’s remember that for many, discretionary spending may be curbed and thus bills will still be paid.

For our part, I do not doubt there will be more bumps in the road over the next year or two – but that doesn’t change our fundamental purpose: to get borrowers into their homes and keep them there.

Mortgage brokers have never been more important in this context. There is an old saying that you really earn your corn when times are tough – not when they are easy. This is true for lenders and brokers.

We cannot do this without you. Nor can our customers. Advice is always crucial, and never more so than now. Our industry was accused of order-taking and rate-chasing back in the run-up to the credit crunch. We could not be farther from that today. A borrower facing remortgage or even reversion to a rate several percentage points higher than their existing rate needs help that is complex in its scope. Affordability and proof of income are now just two of a considerably longer list of serious financial considerations.

What borrowers need is reassurance. From some borrowers’ perspective, the world may appear to be an increasingly worrisome place, and they need to know that their mortgage lender is here to support them. While we will do as much as we can to reassure our borrowers, we know it is our broker partners who are really well placed to be able to offer that reassurance, given the incredible trust they have built up with their clients over many years. It is this trust that will stand us all in good stead in the long term. M I

The need for efficiency remains – the motivations evolve

Steve Carruthers

business development director, IRESS

This year’s Mortgage Efficiency Survey shed light not only on lenders’ use of technology to support the origination and writing of mortgage business, but also uncovered issues that are affecting and defining efficient lending and servicing.

Here’s a taste of the major challenges and opportunities lenders see in the coming months.

SPEED INTO AND OUT OF THE MARKET

While we’re all hoping that the extreme volatility of the past few months will die down now Rishi Sunak is in post, the coming year is going to see interest rates continue to climb to tackle inflation, whoever’s in numbers 10 and 11.

There’s no telling whether swap rates and market confidence will settle either, but the need to reprice products quickly is a certainty.

Following Kwasi Kwarteng’s notorious mini budget and the consequent impact on the bond markets, funding costs in the money markets soared. Lenders were left very exposed.

The domino effect of those at the top of the best-buy tables withdrawing their entire ranges with immediate effect was sobering.

The day after Kwarteng’s unfunded tax-cutting bonanza aired, lenders pulled 935 products – the highest daily drop on record, according to Moneyfacts.

Lenders left in the market found themselves flooded with enquiries and panicked applications; processing centres and service collapsed.

With luck, product repricing will be significantly more orderly in 2023, with the Bank of England trailing its intentions for monetary policy well ahead of time.

Nevertheless, lenders now recognise that speed into and out of the market, the ability to scale, and the need for robust, agile systems are now paramount.

CREDIT CYCLE

The cost-of-living squeeze is already testing parts of the mortgage process that have, if truth be told, lain unexamined throughout an era of historic low and static interest rates.

First among many considerations is how lenders deal with a steep rise in the volume of customer calls relating to credit queries, arrears, and forbearance.

Employment is the single biggest factor influencing how big that uplift is, but even if the jobs market remains stable, energy bills, food inflation, and a considerable jump in mortgage payments and rents are inevitably going to take a toll on millions of borrowers.

How lenders deploy technology in this rapidly changing environment is one of the biggest challenges faced across the market.

BUILDING SOCIETIES

Historically, the mutuals sector has struggled to keep pace with the large high-street banks when it comes to slick customer experience and more streamlined backstage processes. That’s really starting to shift.

Larger societies saw a marked improvement year on year with their application to offer conversion rates, citing improvements in processing efficiencies through better use of technology. Their offer-to-completion rates remain strong as well.

That said, there is still ground to cover. Smaller regionals dropped back slightly across both measures as a result of increased volumes, lower-quality packaged cases, and manual processes. But across the piece, the advent of new cloud solutions to challenge legacy thinking and systems has meant lenders are in better shape than ever to meet what the market throws at them.

OPEN BANKING

For the second year in a row, lenders’ enthusiasm for open banking barely registered at all.

In an intermediated market – some 88 per cent of business is going through brokers – getting timely consent is incredibly difficult.

There’s also real concern among the lenders we surveyed that open banking causes more problems than it can solve. Automated income verification, a tool used by some lenders, offers as much insight as many feel they need.

Indeed, one participant in the research for this report said, “I don’t need more reasons not to lend; we are a lender – if we don’t do that we may as well pack up and go home.”

PRODUCT TRANSFERS IN A NEW ECONOMY

Product transfers for consumers and intermediaries have been high on the agenda in all peer groups – although some challengers and specialists do not currently have the market share or age of products to justify online product-transfer investment.

In an era when interest rates were not rising, product switches were a relatively easy sell to borrowers. Now the new product rate will invariably be a lot more expensive.

This is a sample of the report’s findings, and I would like to thank publicly everyone who contributed.

You can download the full report from our website. M I