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Round table: A greener future for mortgages
A GREENER FUTURE FOR MORTGAGES
Everyone is talking about being ‘greener’ – but could the mortgage industry do more to embrace energy-saving concerns? Simon Meadows covers our latest round table discussion
Green issues have come a long way from when environmental concerns were considered a niche interest, dismissed by many in previous decades as a preoccupation of social activists. Not any longer. An ever-growing awareness of the impact that we are having on our planet has moved the debate from the fringes to the centre ground of our political discussion and filtered into our everyday lives, embraced by everyone from our new sovereign, King Charles, to armies of campaigning schoolchildren. The UK government has, meanwhile, committed to making the UK carbon-neutral by 2050, meaning that for all the CO2 produced in the UK each year, the same amount will be cancelled out by energy-saving measures. With our homes making up an estimated 22 per cent of the UK’s total carbon emissions, we arguably all have a part to play in this.
Sustainability is now the buzzword of young and old, it seems, permeating conversations from the breakfast table to the boardroom, and it’s making its mark, too, in the mortgage industry, due to the sector’s inseparable link with property, where so many of our environmental concerns are focused.
Much of the green debate surrounds how we can decarbonise our homes, making them more energyefficient and sustainable, be it with solar panels, heat pumps, or cavity wall insulation. And this debate has gained traction with the recent escalating costs of energy and anxiety over how homeowners might be able to afford to heat their properties.
Yet there is still, clearly, a huge amount of work to be done if the UK is to hit its 2050 target. As many as 15 million homes in England and Wales could need energy-efficiency improvements to meet the proposed target of an Energy Performance Certificate
“Now, more than ever, we need to come together and ensure that as a sector, the intermediary market is really leading the charge in the green space” AMANDA BRYDEN
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(EPC) band C rating by 2035, according to recent data published by Halifax. Just 10 per cent of pre-1900 homes reached the C band. For the 4.2 million homes built before this date, the average EPC rating was only E. With around 25 million properties in England and Wales, this means 60 per cent of the total housing stock might require work. It is estimated that around a quarter of heat loss from poorly insulated homes is through roofs, a third through external walls, another quarter through doors and windows, and the rest through floors. One of the key differences between older and newer homes that affects energy efficiency is how they are designed to address damp. In older homes, ventilation between floors and ceilings and under roofs is how moisture is dealt with, which in turn means poor heat retention. Modern homes favour damp-proofing under solid-block floors. Other differences include little or no insulation in floors, walls, and ceilings, single-glazed windows, open fireplaces, and lower standards of construction in key areas like doors and windows, causing draughts. Heat lost from homes varies depending not just on the construction, but also on the type of property. Flats are the only type of home that, on average, achieve an EPC rating of at least C.
Furthermore, according to figures published by New Scientist, the UK had the worst track record in Europe last year for the installation of heat pumps, a technology many experts view as essential for eliminating the carbon emissions produced by heating homes. They are effectively reverse refrigerators that typically draw their heat from the air or the ground with an electricity-powered pump before increasing the temperature. A total of 42,779 heat pumps were installed in the UK last year (1.48 heat pumps were installed per 1000). At this rate, it would take more than 600 years to reach the Climate Change Committee’s net-zero goal of 27.2 million homes having a heat pump by 2050.
The mortgage industry can potentially play a big role in the ongoing drive to make our homes greener, as property buyers seek funding for ecofriendly new-builds or retrofit improvements to older homes. To gain a better understanding of how the sector is addressing sustainability, Mortgage Introducer, in association with Halifax Intermediaries, brought together six highly knowledgeable industry professionals for a discussion. They were: Amanda Bryden, head of Halifax Intermediaries & Scottish Widows Bank, Lloyds Banking Group; Rebecca Wynne, sustainability proposition manager (homes), Lloyds Banking Group; Grant Hendry, director of sales, Foundation Homeloans; Nicholas Mendes, mortgage technical manager, John Charcol; Daniel Capstick, head of mortgages, Ecology Building Society; and Erika Moreira Baker, senior product manager, Mortgages Sustainability, Barclays UK.
SUSTAINABILITY CHALLENGES
How did they think the issue of sustainability in the mortgage industry had advanced this year, particularly in light of the economic downturn? Amanda Bryden, from Halifax Intermediaries, acknowledged the hurdles the industry faced.
“There is clearly a challenge for both broker and consumer education around sustainability, which is further exacerbated by the cost-of-living crisis and a perception that it is going to cost customers an exorbitant amount of money to make their property more sustainable,” she said. “As lenders, I think the
key role we have to play is around educating brokers, and in turn customers, that this isn’t necessarily the case. We are embarking on a major internal education programme to enable our team to have a full understanding of the importance of green and how this engages with the race to net zero, but also the role that they play in helping brokers to understand the issue, the importance of sustainable housing and what we as a lender are doing to help them. Brokers can then educate their own clients, showing them the value of advice throughout the lifecycle of their mortgage.”
Bryden highlighted Halifax Intermediaries’ Home Energy Saving Tool (HEST), explaining it helped brokers introduce sustainability to a client conversation in →
Save your energy.
an easy, practical way, with simple questions about green home improvements, the answers for which could provide an estimated EPC rating of a client’s property and predict likely CO2 emissions, as well as the indicative costs of improvements, all wrapped up in a personalised action plan.
“If we reflect on the summer heatwave and challenges it presented, there is an urgent need to adapt housing stock to mitigate climate change. It’s clear we need to act,” urged Rebecca Wynne from Lloyds Banking Group, which is committed to creating a more sustainable and inclusive future for people and businesses. “There are a number of green mortgages in the market that incentivise those with greener homes. The key challenge is reducing emissions within existing housing stock.” Wynne further explained that the pace of decarbonisation would be affected by homeowners feeling unable to make energy-efficiency improvements to their properties due to growing inflation and interest rates. Homeowners may not consider it a priority because they might not be able to justify the costs, particularly when those could be upwards of £16,000. On the other hand, the rising cost of living might motivate some who were looking for cheaper energy-running costs. “Looking at the demand for heat pumps alone, research suggests it’s increased by around 20 per cent, so people are clearly willing to act to get ahead of any further increases to gas prices,” Wynne pointed out. “There’s also uncertainty in terms of government policy to upgrade as many homes as possible to EPC band C by 2035. Recently, the government has been focused on addressing inflation challenges. So I think the challenge for lenders is that without a clear plan in sight, the speed of innovation for more green finance options is being hindered. How do we understand the energy efficiency of a home during
With our Home Energy Saving Tool...
the application journey, collate data, and automate it early in the application process to prevent potential delays?”
For Nicholas Mendes, representing John Charcol, an independent mortgage broker, knowledge is power. “I think one of the key things when it comes to sustainability is about brokers really educating themselves,” he suggested. “There’s a lot of ignorance – advisors not really selecting the right products when it comes to new builds and green mortgages or going with something they already know, out of fear more than anything else, that they [may] do something wrong. As brokers, do we do enough to educate the client in terms of home improvements and the ways in which you can improve the home? Probably not. We don’t really challenge EPCs as much as we should. If I take my personal circumstances, we bought our home in 2014, we’ve done work on it, and the likelihood is the EPC has probably improved. I have not actually done a new EPC – it lasts 10 years, so presumably I might have been able to benefit from a green mortgage. I think there’s more that we can do to really encourage clients to have those conversations and, actually, if you’re doing any work, just factor in the good things that could come off the back of it and potentially how it would affect your mortgage.”
Discussions around sustainability have progressed significantly in the mortgage industry, believed Erika Moreira Baker, from Barclays UK, which is aiming to become a net-zero bank by 2050. But she noted that customers still needed to be engaged. “We’re spending a lot of time and effort understanding our book and our emissions,” she explained. “We’re doing a lot of work to understand customer behaviour and what it is that drives them to retrofit. The key challenges are around the initial investment, the upfront cost. Energy prices have gone up, and the key driver for customers, especially with the rising cost-of-living, has been to reduce their bills. The cost of materials and the cost of labour have gone up significantly as well. We’ve heard customers talk about environmental considerations and social pressure, but they also say, for example, that they don’t need to replace their boiler, it’s still working well. There’s an element of a lack of urgency and certainly a lack of knowledge as well. There’s a sense that there’s a lot of risk around it, and customers are afraid that the technology might not work for their house.
We’ve found that they find it difficult to identify real, tangible short-term benefits to retrofitting work, and that is a key barrier that we’re trying to address.”
Recent data suggested the UK had a combined capacity of 13.26 GW of solar PV power, enough to power around three million British households. According to the Solar Trade Association, around 900,000 British homes have had solar PV panels installed. Daniel Capstick, from Ecology Building Society, which provides mortgages for self-build projects, drew attention to an increase in the offering of green mortgages. “It’s our mission to combat climate change through our lending activity,” he said. “So, every single mortgage that we approve, there is some positive environmental impact or sustainability impact, and through that all of our products, typically on the residential side, are all designed with that in mind. When you look at what the mortgage industry has to do for the sustainability of properties, it falls into two parts: new and old properties. A lot of the products that we see are aimed at new properties, and they’re still relatively expensive compared to traditional mortgage products. There’s very limited choice in terms of what I would describe as green mortgages, which really target the renovation or retrofit market. If we are to hit these net-zero targets that we want to hit in 2050, then that really is where the focus has to be. So it would be great to see more mortgage propositions, pricing, and incentives for consumers, to target that market and really incentivise them to do some of the work that they should be doing to improve the renovation and energy efficiency of their dwellings. That can be many things – insulation, glazing, heating types, things like that.”
Grant Hendry, from Foundation Home Loans, an intermediary-only lender, believes that brokers could play an important role in supporting lenders and informing buy-to-let landlords about what they need to do to be energy efficient. “EPCs need to be part of a broker’s fact-finding process,” Hendry maintained. “They should be asking, ‘When did you have your EPC done, what was the score on there? Get these improvements done before we do the mortgage because that’s going to get you a better rate, it’s going to make sure your property is green.’ An EPC makes a property more marketable from a landlord’s point of view, as they’re able to charge more in rent when somebody’s bills are less. We’re trying to find ways in which we can educate those landlords and our customers. Roughly about 40 per cent of our book is in band D. When you look at energy efficiency improvements, it’s not so much about how much it’s going to cost and it’s not all about solar panels and air source heat pumps. It’s about doing simple things, such as replacing light bulbs with LED, it’s about doing loft insulation, to improve your EPC band.”
GETTING BROKERS INVOLVED
The engagement of brokers in sustainability had been mixed, reflected Bryden. Some had been early adopters, and there was an appetite to increase their knowledge, but others still had some way to go in getting fully onboard. “There is a real opportunity for brokers to reinforce the value of great mortgage advice and bolster this by demonstrating their understanding of the sustainable homes challenge and what it means for homeowners,” she said. “That is where we, as lenders, have a key role in increasing this engagement. We have introduced our Green Living Hubs, to which clients can be signposted to help them understand basics, such as what an EPC is, its value, and we offer free virtual green events on renewables, such as how solar panels work and demystifying heat pumps, alongside considerations of whether these could be the right solution for homeowners considering their options. As a bank we do not give advice on specifics of what improvements are suitable, as we leave this to the experts, but we have teamed up with Energy Saving Trust, an independent organisation, to provide an impartial view, helping customers get the answers they need and to share the factors to consider when hiring tradespeople.”
While there are evidently initiatives in place to →
...it couldn’t be easier.
drive change in the mortgage industry, Mendes recognised that some mortgage advisors may be averse to change. “I find that a lot of brokers are essentially creatures of habit,” he noted. “So anything that’s outside of the box they probably try to avoid, and it takes time for new policies to come into play. I think there’s more that can be done from lenders as well to really encourage that conversation. For example, if a broker has put a deal on a particular property and that lender can see that its EPC is a C or above, highlighting that qualifies [it] for one of our other products, which might be more costeffective.”
MAKING EPC CHANGES
It was not always necessary to have an EPC when remortgaging, Barclays’ Moreira Baker pointed out, but it was worth asking your customer for one, so that you could identify what product was best for them. Likewise, a client buying a property to let with a low EPC rating should be informed of upcoming legislation covering the letting of properties. “We’re keen to work with brokers, to understand what help they need from us and how can we help them have better-value, meaningful conversations with clients – not just ticking the box, but adding value,” she reasoned, explaining that the conversation needed to be broadened to embrace wider environmental concerns. “We need to consider that with climate change, we are expected to see more adverse climate events. So I also think there’s a role for lenders and brokers to think about how we can engage our customers on other climate risks, such as floods, subsidence, and coastal erosion.”
Hendry referred to recent political uncertainty in the UK, which might, for example, deter someone
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from installing solar panels while they hold out to see what changes there might be to government grants. He believed, though, that the industry was not doing enough to help customers increase properties to an EPC C band. “That’s where we need to up our game and not just pick the low-hanging fruit and the easy option,” Hendry told the panel. “If I’ve got a rate at five per cent and another lender’s got a rate at 4.5 per cent, but it’s not a green mortgage, a customer is not going to take the green mortgage. So we need to evolve the product and make it more attractive for a customer to understand why they’re doing it, and give the brokers the tools and the education to be more engaged in that space.”
He continued, “I think my frustration is that I’m having the same conversations a year or two years on from when we first launched, and we haven’t evolved further. As a lender, we really want to get it sorted to support more landlords. When a case comes in, submitted as a standard product, we look at the EPC of the property, to use that as a window of opportunity to say, ‘Have you looked at a green mortgage? Because this property is a band C,’ which on a buy-to-let may allow the customer to borrow another £10,000 to £20,000.”
Brokers have a duty of care to their customers to find the best deals for them, whatever their circumstances, emphasised Capstick, but there needed to be more robust, green lending products. “They are probably doing their best for their consumers based on what they require, but there’s a distinct lack of green mortgages at competitive terms to signpost to consumers,” he observed. “We reward customers with lower interest rates based on the standards they achieve. That rate will lower, depending on the environmental outcome that they achieve, and that discount lasts for the life of the mortgage, incentivising the consumer to do more work. So we have a clear product that targets that retrofit agenda to improve the EPC, whether it’s all in one go or incrementally. And we’re looking to develop more enhancements to that. We’ve been calling for a national retrofit strategy to kickstart a retrofit revolution, to make warm homes affordable. We’d like to see the government apply a lot more activity to support green buildings activities – so, grants, stamp duty reforms, tighter building regulation, improving the retrofit supply chain of contractors. In a world where some are advocating low-carbon heating, like heat pumps, which use electric, gas
still remains significantly cheaper than electric. So we need the right level of investment and fiscal incentives to address the issue of the mismatch between gas and electric cost per kilowatt hour.”
He added, “From our own viewpoint, we’ve seen a significant increase in broker business, but we are inherently different, so everything that we do has a sustainability and energy-efficiency aspect to it. Brokers control a lot of the mortgage market, so they’ve got a massive role to play, in conjunction with lenders.”
CREATING DEMAND
There was demand from borrowers for funding for retrofit improvements, said Bryden, but she acknowledged a challenge in the availability and quality of data to verify completed improvements. “For us to scale, to offer incentives attached to retrofit, we need to ensure and validate that the money borrowed is spent on reducing the carbon footprint of a home,” she conveyed. “On top of this we also need to consider the implications from a regulatory reporting requirement [perspective] in relation to securitisations of mortgage assets.”
Agreeing that this was challenging, Wynne said, “We’ve aligned very closely to government grants, so they can work in tandem. We’re seeing more interest in or claims for solar panels and low-carbon heating as well as insulation measures. We definitely see brokers are our key enablers to be able to scale that. While it’s still early days, we do need to consider what data is available, how it can help us understand the current and potential energy efficiency of a home, how we can scale it – and, more importantly, how we can automate it into the journey. It’s about enabling the capability to then develop and innovate. Changes are coming.”
Considering what political and economic factors might be driving lenders to act more sustainably, Wynne added, “I think, from an economic perspective, with the immediate challenges, there is growing concern that more households will fall into fuel poverty or fuel stress and therefore will be choosing between putting food on plates vs turning the heating on, so driving customer awareness of the cost savings of an energy-efficient home is the right thing. In terms of future policies, there is a disparity among the devolved governments and their timelines, so there are still those gaps around policy and how the owner-occupied are supported on that energy-saving transition that will drive innovation in the market.”
Mendes, meanwhile, identified a change in customers’ approaches.
“People are being more conscious about how they save and invest, and likewise how they borrow their money,” he told the panel. “So some of the conversations that we’re starting to see filter through are clients actually being really an advocate in terms of who they want to go with and who they don’t. I think it’s really important for lenders who are looking at coming out with green products and are looking at supporting initiatives to be quite vocal about what they’re doing. It would be great to see a fixed rate that reduces over time when the EPC has improved. I think that would be a really good incentive, especially for clients taking long-term fixed rates and actually getting the benefit from it.”
Bringing the discussion to a close, Bryden offered this final, thought-provoking summary: “One of the key pain points is a lack of understanding around sustainability and green. Clients don’t know what
“EPCs need to be part of a broker’s fact-finding process. They should be asking, ‘When did you have your EPC done, what was the score on there? Get these improvements done before we do the mortgage’” GRANT HENDRY
improvements they can make, how they can finance them, and who to turn to to get the work done. I don’t think this is just linked to the mortgage sector; it’s a much broader housing challenge, and something that lenders, brokers, and tradespeople will need to work together on. It isn’t something that one or the other is going to fix themselves.”
She concluded, “Now, more than ever, we need to come together and ensure that, as a sector, the intermediary market is really leading the charge in the green space, and that is why it is incumbent on lenders such as ourselves to begin that education programme and work together to educate consumers on its importance.”
