Green Mortgages January 2022 by mortgageintroducer

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GREEN MORTGAGES

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January 2022

GREEN DREAMS The role of green mortgages in improving the UK’s housing stock

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Lower rates with our green mortgages We’re supporting the UK’s green initiatives in the Private Rented Sector, offering lower rates to landlords for properties that are EPC rated A-C.

Find out more about our extensive range of green mortgages at www.paragonbank.co.uk/green-mortgages

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10/01/2022 16:04

EDITORIAL

COMMENT

Publishing Editor Ryan Fowler Ryan@mortgageintroducer.com Editor Jessica Bird Jessicab@sfintroducer.com Deputy News Editor Jake Carter Jake@mortgageintroducer.com Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Sales Executive Tolu Akinnugba Tolu@mortgageintroducer.com Advertising Sales Executive Jordan Ashford Jordan@mortgageintroducer.com Campaign Manager Victoria Hubbard Victoria@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com Printed by The Magazine Printing Company, using only paper from FSC/PEFC suppliers www.magprint.co.uk

MORTGAGE

INTRODUCER

The green revolution

alk of climate change is nothing new and - despite having its sceptics - there finally seems to be a sustained eﬀort to make changes to evironmentally damaging

actions. And our homes have a huge impact on the environment. Poorly designed and constructed buildings use more energy, increasing the demand on energy production and contributing to global warming. Reducing energy use in buildings is one of the most important ways to reduce humans’ overall environmental impact. Whilst it may be tempting to thinking that techenabled new-build homes are the way out this situation and that the older stock should be ditched that is not the case. Indeed, new-build properties can take 20 to 30 years to start countering the carbon embodied in their construction — and with the government’s target of getting greenhouse gas emissions to net zero by 2050, there isn’t enough time. This means the key to reducing the environmental impact of homes will be to reduce, reuse and retrofit. But the aﬀordability of change is a really big challenge. The government has started to oﬀer incentives but the mortgage market will have a key role in providing the funds homeowners need to get their properties up to spec. We’ve seen a number of lenders enter the green mortgage and remortgage space and options are starting to grow for borrowers. There is a long way to go but luckily the market is already taking the first steps towards a greener future.

Contents 4 Feature: Green dream or sustainable reality? Natalie Thomas considers the shift towards green mortgages, the challenges faced by this market, and the impact of upgrading the UK’s housing stock 10 No time like the present Jessica Bird and Richard Rowntree, managing director – mortgages at Paragon, discuss climate change and the finance of the future 15 Martese Carton Committed to a greener future 17 Craig Calder Green is not a gimmick 19 George Gee Growing interest in greener properties 20 Lending for a better future Mortgage Introducer’s round-table discussion covers current green mortgage trends, and how this market needs to evolve to more eﬀectively face the climate crisis 26 Key facts and figures A look at the current data behind the green mortgage market

Speak to your Regional Manager about our green mortgages today! Mortgage Introducer Green Mortgages supplement adverts.indd www.mortgageintroducer.com

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JANUARY 2022

10/01/2022 GREEN MORTGAGES

16:04

FEATURE

COVER Natalie Thomas considers the shift towards green mortgages, the challenges faced by this market, and the wider social impacts of upgrading the UK’s housing stock

n paper, the concept of a green mortgage looks appealing. After all, what is there for borrowers not to like about a mortgage that potentially offers a lower rate, at the same time as helping them do their bit to tackle the growing issue of climate change. In reality, however, any broker who has delved into the world of green mortgages will know that at times it can be a confusing space, with the intricacies, benefits and pitfalls of such deals not always apparent. Things are improving, though. Since the first green mortgage launched back in 2018, lenders have become more confident in their offerings, and awareness around the products available in this field is increasing. This is good news, as the mortgage market and the government have a large job on their hands if they are to embark on upgrading the UK’s housing stock – one of the oldest in Europe, and a key contributor to the country’s carbon footprint. According to the UK Green Building Council’s ‘WholeLife Carbon Roadmap’, approximately 20% of the nation’s homes were built pre-1919, with 85% still using a gas boiler for heating and approximately 50% with uninsulated walls. The government has set a target for as many homes as possible to achieve an Energy Performance Certificate (EPC) rating of C by 2035 – something which is a requirement for all new tenancies from 2025. This will be costly – research from the UK Climate Change Committee estimates that £250bn needs to be invested in home upgrades to enable the UK to reach its ambitious target of net zero emissions by 2050. Figures from the Office for National Statistics (ONS) also show that just 3% of the UK’s housing stock carries an energy rating of A or B, while some 19 million (68%) are currently below the recommended C rating. As 2022 begins, and the sustainability agenda continues to gather pace, it is hoped that green mortgages will start to become more mainstream, but what needs to happen before that takes place, and how can brokers help make the green dream a reality? The sheer scale of how many properties need upgrading represents not only an enormous challenge, but

GREEN MORTGAGES JANUARY 2022

GREEN O DREAM also potentially a huge opportunity for brokers and lenders in the green market. Thus far, however, some of the offerings from lenders have failed to ignite the imagination of brokers and borrowers. Gemma Harle, managing director of Quilter Financial Planning, says: “One of the big problems is that there is no consensus across the lenders in regard to what actually constitutes a green home. “Therefore, some homes will qualify for a green mortgage while others won’t, which doesn’t make it a level playing field and can cause confusion for consumers. Similarly, there are millions of homes across the UK that simply would not be able to be improved enough to reach a rating that would make them qualify for one of these types of mortgages. “Looking across the spectrum of green mortgage products available, the deals are not competitive enough to make people really sit up and take notice.” According to the Green Finance Institute, more than 10 mortgage lenders in the UK have launched green mortgage products since the beginning of 2021 alone. However, this is still a relatively small proportion of the UK’s £1.58trn mortgage market. One of the most common types of green mortgage is a product which offers the borrower a lower mortgage rate in exchange for buying a property with a good energy efficiency rating – usually A or B. Some lenders also offer additional borrowing at a reduced rate if a certain proportion of the funds are being spent making a property more energy efficient. The increased expenditure by borrowers is hoped to ultimately save them money in the long-term through reduced energy bills – as well as potentially increasing the value of the property. Sebastian Murphy, head of mortgage finance at JLM Mortgage Services, believes the problem with some current deals is that they are not doing enough to encourage borrowers to carry out renovations. “Green mortgages are not working well at present, as they are rewarding clients by default rather than merit,” he says. “A lot of the green products are aimed at clients with very high performing, energy-efficient new homes. → www.mortgageintroducer.com

FEATURE

COVER

SUSTAINABLE R REALITY?

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JANUARY 2022 MORTGAGE TECHNOLOGY

FEATURE

COVER

The green evolution is underway Ben Thompson deputy chief executive officer, Mortgage Advice Bureau

here is generally an increased awareness about green mortgages, but this is predominantly within our industry, less so with consumers who generally know little about this topic. Our research found that more than two in three (69%) consumers have not heard of a green mortgage, despite it potentially reducing monthly mortgage payments based on how eco-friendly their property might be. People are increasingly concerned about the environment and the planet’s future, and many are thinking about how they can make their homes more energy efficient, yet very few are aware of green mortgages. In the lenders space, we also found just one quarter (25%) of lenders currently offer a green or net zero mortgage product, but positively, many more are thinking about doing so in the near-term. Only the minority now are yet to turn their minds to this. PROS AND CONS There are products available, but most are targeted towards incentivising or rewarding those who are buying or living in homes that are already energy efficient. Given that nearly 20 million UK homes are rated lower than C, it is disappointing to not see much innovation or product design in this area yet. For mortgages to make a difference in terms of helping homes to become more

energy efficient, lenders really need to invest their time, thinking and execution of product into helping sub-C properties get up to A, B or C ratings. There are many ways this can be achieved, but from a lender perspective this simple concept is not one that is easy to deliver. WHAT NEEDS TO HAPPEN? Change will come over time. In some ways, as new and younger borrowers enter the housing market, demand will strengthen. Equally, I can see a day where the whole financial system behind UK mortgages aligns with the massive net zero 2050 objective, in that there is real value in a lender attracting and holding energy efficient homes to back their mortgages. It would stand to reason, I would suggest, that what’s missing now is clear messaging to consumers. Many may not wish to spend say £10,000 to save perhaps £500 a year on bills. But if it is suggested – or better still, evidenced – that a house value would be worth a lot more if it were rated higher, one might then think differently and act accordingly. It ought to be the case that there is a return on investment that is demonstrably clear to consumers, although that will be a challenge for a while, as there is no clear modelling or sample base of case studies to really point to or support that yet. HOW GREEN MORTGAGES WILL EVOLVE Builders and landlords are ahead of the curve on this for obvious reasons, but green

The real challenge we have to tackle as a country and as an industry is how we improve existing, traditional housing stock.” Harle believes the cost of getting a property into shape far outweighs the cost savings that many of the products currently provide. “The deals on offer simply need to become more competitive to drive up demand and better incentivise people to make changes to their home so they can take advantage of them,” she says. “While many people want to do the right thing, there is no better way to get people to act than by helping them to save money.” Another way to incentivise borrowers could be to ‘flex’ the affordability rules on these specific products, she

GREEN MORTGAGES JANUARY 2022

mortgages will ultimately become much more prevalent across all mortgage market segments, not just buy-to-let (BTL). Put simply, they will become more prominent. Intermediaries have a real chance to embrace this change and add value with their customers. There is still a lack of awareness among consumers, so at this time I don’t see many customers walking into a high street branch or phoning their lender to enquire about green mortgages and upgrading their homes. But I do see that intermediaries can help customers greatly in this whole area. As mentioned earlier, there is value in lenders holding energy efficient assets, and I think the value intermediaries can offer in supporting lenders in this area is potentially huge. That should bode well for intermediaries and for lenders as it would entail a very close working relationship, more so than today. I would encourage everyone who is managing a business in this area or advising customers daily to really have a look at this and become excited about the opportunities that they will create. At MAB, we can already source green mortgages via our platform, and I see generally across the whole marketplace that everyone is presented with a tailored suite of options according to the property they are buying or re-financing. EPCs will need to evolve too. This is something that surveyors could potentially work on or almost reinvent their businesses around to the benefit of consumers and lenders.

suggests, adding: “This would be under the assumption that someone living in an eco-friendly house will have lower bills and therefore can borrow more each month.” BTL MAKING INROADS As is the case with many things, real change does not occur until there is an urgency to do so. For green mortgages, one area that is starting to see a notable uptake is the buy-to-let (BTL) market, for just this reason. Paul Brett, managing director of intermediaries at Landbay, explains: “The government wants all homes to have at least an EPC rating of C by 2035, but for landlords the dates are much sooner – 2025 for new tenancies and 2028 for existing tenancies. www.mortgageintroducer.com

FEATURE

COVER “Considering the majority of housing stock in the UK is rated D to G on carbon dioxide emissions, this is a tall order. “Offering grants will help, but the government’s Boiler Upgrade System, which is being introduced in April 2022, has its limits. Homeowners and landlords can apply for a grant to replace gas boilers with heat pumps, but the grant is only £5,000 for an air source heat pump or biomass boiler in rural areas, and £6,000 for a ground source heat pump. “Heat pumps can cost twice as much as this, so the grants will not be enough of an incentive for many people.” This does, however, pave the way for landlords to think about remortgaging in order to raise the funds. “As we get closer to 2025 and 2028, I think we will see more landlords upgrading their properties to meet the EPC C rating requirement,” says Brett. “That should lead to more BTL investors remortgaging onto a green product.” Since launching its green BTL range in June 2021, one in 10 of LandBay’s new loans are now green, he reveals. If a property has an EPC rating of A or B it offers a 0.1% discount and for a C rating it is 0.05%. “Most new homes built today are within the A to C EPC rating, so many more people buying new-build would be eligible for a green mortgage but just don’t know they exist,” Brett adds, outlining the importance of awareness as this market evolves. “Brokers could build in green alternatives for their clients, which would raise awareness and increase the take-up,” he explains. “We have already seen several lenders enter the green market in 2021, and more will follow. As people become more aware that green mortgages exist, and they can get a lower rate, there will be an increase in take-up.” Harle thinks the BTL market is likely to be one of the first areas to see lenders compete more fiercely on price and grow this necessary awareness. “Naturally with more demand, BTL lenders will start to flex their pricing, thus creating a more competitive marketplace. This will then bring a proliferation of better green mortgage deals,” she says. This is no doubt something to look forward to for landlords – particularly those with larger portfolios where the cost of upgrading across the breadth of their properties could prove substantial. Jason Berry, group sales and marketing director at Crystal Specialist Finance, says: “I recently saw a report which suggested it would cost up to £3,500 to ensure the necessary remedial work was conducted on older style properties in order to move them to the required EPC rating of C or above. “For one of my friends who has a portfolio of 60 homes, this equates being taxed another £210,000. This means professional landlords with large portfolios could face a real burden of expense so planning and action is needed urgently.” → www.mortgageintroducer.com

Technology is streamlining the remortgaging process Stew Horne head of policy, Energy Saving Trust

o meet the UK’s pledge to be net zero by 2050, we need to see greater improvement in the energy efficiency of the estimated 29 million homes, which collectively account for more than 21% of carbon emissions. Established to encourage the private finance sector to provide better ways for homeowners to finance the retrofitting of their homes, green mortgages are based on the premise that energy efficient homes have lower fuel bills, leaving householders better able to repay their mortgage.

“Freeing up money for home upgrades through green mortgages is an important part of the UK’s transition to net zero emissions” There are three broad types of green mortgages that aim to reduce a home’s carbon footprint and help homeowners to recoup any investment over time by saving money on energy bills: ● Cheaper lending rates for homes with high energy efficiency ratings; ● Capital release to pay for home energy efficiency improvements through credit, discounted mortgage rates, or cashback on an existing mortgage; ● Additional borrowing made a va i l a b l e fo r h o m e e n e rg y efficiency improvements through re-mortgaging or moving to a new home that may benefit from energy efficiency work. An average EPC C standard is the minimum rating required collectively to

ensure all homes are on track to reach the UK’s net zero targets. However, most homes currently fall within band D. Improving a home’s EPC rating has also been shown to add significant value – on average 14% for properties moving from EPC G to A or B. The upfront cost can be barrier for many people, so freeing up money for investment in home upgrades through green mortgages is an important part of the UK’s transition to net zero emissions. While green mortgages are a relatively new concept, we expect to see them become more established in the UK housing market and for households to have a greater awareness of the benefits. Research carried out by Energy Saving Trust suggests that the most significant home renovations take place within the first year of ownership. We therefore need to see lenders offering competitive rates for green mortgage deals to stimulate the market and start to put energy efficiency at the forefront of both the lender and buyer’s thinking. IMPROVING THE RATINGS A new-build home that is A-rated will have high levels of insulation built into all the external walls, floor and roof, with high performance windows and doors. There may be a low carbon heating system, such as a heat pump, mechanical ventilation with heat recovery, and solar photovoltaic (PV) panels on the roof. In the UK, more than 80% of the homes we will be living in by 2050 are already built. Retrofitting can range from simple steps, such as installing loft insulation or double glazing, to more sophisticated approaches, such as looking at the whole building and refurbishing it to reduce heat losses to a minimum. It may also require changing the energy source by installing a heat pump or other low carbon technology. Each home is unique and will have bespoke requirements.

JANUARY 2022 GREEN MORTGAGES

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Holding to account Peter Barnes head of Mortgages for Business Intermediaries

reta Thunberg has torn into Joe Biden’s green agenda recently, saying it was strange for Biden to be considered a leader in climate change, considering his administration’s stance on the use of fossil fuels. The US leader pledged to crack down on new gas and oil leases as part of his electoral manifesto – but he has yet to follow through on his pledge. I t ’s l u c k y T h u n b e r g i s ke e p i n g Biden honest. In the mortgage industry, it’s the borrowers who are holding us to account. Lenders and brokers who want to grow have to adapt to their demands and our research suggests three in every five landlords are interested in green mortgages. When we polled our borrower clients, 62% of landlords described themselves as interested in mortgages that reward borrowers with discounted rates for making their properties more energy-efficient and shrinking their carbon footprint. They are the Greta Thunbergs of the mortgage world, and they are driving a new wave of green mortgage innovation. But this statistic also marks a huge change in the priorities of borrowers. When we polled them, not a single landlord who had purchased their first buy-to-let (BTL) property before 2000 said they had been interested

in green mortgages at the time. Only 10% of the landlords who had acquired their first BTL property in the noughties said they had been interested in green mortgages when they made the purchase. Given that housing accounts for such a significant chunk of the UK’s carbon emissions, it’s great that landlords have seen the light and are driving the green choice agenda. I suppose the powers that be deserve some credit, too – landlords know they have to upgrade their properties to meet new EPC rating rules. So the demand is, finally, there. Of course, it should be. Quite apart from the ethical considerations, green mortgages reward landlords whose properties meet the higher energy efficiency standards. Is mortgage supply ready to meet demand? There are various green mortgage products out there, but many reward the housing stock that is already meeting the higher energy efficiency rating. But how do the landlords raise the money required to improve their existing properties to meet the required ratings of C or above? If the property is already leveraged at 75% or 80% loan to value, there’s no scope to refinance unless a lender can consider the future value that improving the EPC may attribute. This is not currently possible within the specialist BTL mortgage lenders, due to how they are funded. Bridging may be an option, but not an ideal one given the short-term nature of the loan. Then there’s the issue of any additional

Berry believes it is just a matter of time before green mortgages become popular, spurred on by movements within the BTL sphere. “We have seen demand for green mortgages remain pretty low during 2021, but the penny is starting to drop that change is coming and is unavoidable, particularly with professional landlords,” he says. “Any product that can deliver a better outcome for a borrower always has a place in the discerning broker’s toolkit. It is just a matter of time before green mortgages become trendy and attractive. “That said, pricing differentials and criteria benefits are not quite where they need to be at the moment. However, increased lender participants will drive competitiveness to another level, along with a lightbulb moment which will spark landlords into action.” However, a spokesperson for the National Residential

GREEN MORTGAGES JANUARY 2022

borrowing having to meet the stress tests applied to capital raise. Again, lenders have little or no scope to go against Prudential Regulation Authority (PRA) guidelines to navigate around this issue, even if the improvement made merit an increase in rent in the future. Finally, actually doing the work required may mean the property is untenantable while the work is carried out, affecting the tenant, the landlord’s income, and potentially how other lenders may view the refinance of property in that landlord’s portfolio in the future. A solution to the problem isn’t easy to see, and the targets set by the government lack any cohesive plan. More thought – and some real innovation – is required. Balance sheet lenders may be able to adapt quicker and possibly apply reductions to rates on completion of an energy efficiency project. A green mortgage could mean that, once they can confirm they have a revised energy rating for their property, the right lender will remortgage on to a more attractive green rate. That is a critical distinction, because much of the UK’s housing stock is very energy inefficient, making our homes a major source of greenhouse gas emissions. Improving the energy efficiency of the UK’s stock of housing is a priority in the fight against climate change. In September, we learned the UK is lagging behind most European countries in using low-carbon heat pumps to reduce home emissions. Something needs to change.

Landlords Association (NRLA) does not believe the lower rates on offer from lenders are sufficient to entice landlords at present, stating: “Whilst green mortgages are potentially a good way of encouraging the implementation of energy efficiency measures, the current low mortgage interest rates in the market are likely to reduce their effectiveness in this regard. “The government’s English Housing Survey confirms that the private rented sector has the highest proportion of older dwellings of all tenures, with 32% built pre-1919. The cost of upgrading these properties to the highest energy efficiency ratings is significant and the savings of a green mortgage are unlikely to be sufficient to cover this,” they add. The NRLA would therefore like to see “a more strategic approach,” which recognises the specific challenges facing many landlords in the private rented sector. www.mortgageintroducer.com

FEATURE

COVER Murphy also thinks it would be helpful if BTL lenders were more willing to lend on new-build properties. “Lenders need to start encouraging professional landlords into purchasing new housing stock instead of traditional, by getting rid of the ridiculous LTV caps imposed by some BTL providers,” he says. There is also potential for green mortgages to help property professionals fund the conversion of thousands of abandoned commercial properties into residential homes, in turn helping to address the UK’s housing shortage. Guy Horne, chief executive officer of social impact real estate firm HSPG, says: “Recent estimates suggest that converting retail space into residential property would create over half a million new homes. “In London alone, over 20,000 commercial units have been left empty for over half a year. Providing safe and affordable housing is a key way the property market can become more sustainable in the long-term – it’s a core principal recognised within Goal 11 of the UN’s Sustainable Development plan.” He continues: “Demolishing empty buildings and rebuilding something new is an environmentally destructive process which produces significant carbon emissions. “Repurposing dwellings into residential space not only sidesteps the needs for energy-intensive demolition, but provides an opportunity for new-builds to be installed with environmentally friendly features, efficient insulation and clean technology, which are also entrenched in the UN’s Sustainable Development Goals number 7 and 13.” However, Horne warns that this will still not be an easy task, adding: “There is an undeniable housing crisis in this country and, as energy bills, house prices and inflation are all set to increase in 2022, I think the challenge has become even tougher. “This is especially true in the North, which is disproportionally impacted by the housing crisis. Millions of homes are poorly insulated and require unnecessary amounts of energy to run, this is costing people a fortune at the expense of our environment.” It is also important to consider that mortgages alone are not likely to fix either the housing supply issue or the market’s effect on climate change, and they need to be used in concert with a number of other initiatives. This could include homeowners paying less for buying more energy efficient properties, or receiving a stamp duty rebate for undertaking an energy efficient retrofit within a set period – both of which have been suggested by the Coalition for the Energy Efficiency of Buildings (CEEB). Other measures suggested include extending the mandatory minimum energy efficiency standards due to come in for the private rental sector (PRS) to the owner-occupied market also, or for purchasers to negotiate a reduced purchase price for a property www.mortgageintroducer.com

in exchange for carrying out the necessary energy efficiency renovations. Removing or reducing VAT on energy efficiency measures could also be another stimulus. DEMAND AND AWARENESS Increased demand is usually a catalyst for more innovation and competition among lenders, so is borrower awareness around green mortgages key to their success? “There has to be better education and literature provided to clients to give them reasons to improve their homes. Unless we explain the benefits, not much will change,” says Murphy. He adds: “Green mortgages should become the norm and we should see green products for everyone. Most people want to become more green in all aspects of their lives, they just need to be shown how to. “Green products are likely to be more prevalent in the standard residential market first but lenders who recognise the opportunities in the more niche areas will achieve great success.” JLM Mortgage Services’ own research found that more than 90% of its clients felt they needed to be educated and shown the benefits in the area of green mortgages. This suggests that the tide is turning, and lenders should work to keep up. Indeed, those lenders that fail to understand the commercial value of offering green mortgage products could fall behind their contemporaries. Ideally, this interplay of demand and competition should lead to green features simply becoming common to all products. Harle says: “Green mortgages should just become ‘mortgages’. All lenders should offer schemes that provide cash for customers to improve their homes, and at a very minimum offset the carbon emissions produced by the subject property each year. “Despite these types of mortgages being around for a while, there just has not been the impetus from the market for them to flourish. However, the time is ripe for these types of mortgages to evolve further and we are likely to start seeing some dramatic changes that not just impact specific green mortgage products but bleed into regular mortgage products, too. “For example, you might see fixed rate deals have caveats written into them that mean that the borrower will get a better fixed rate under the condition that green home improvements are made.” Whether labelled as specifically ‘green’ or not, Berry believes the impending move towards a greener society will create an increased need for home improvement, and as such, create more business for brokers. This societal move should, therefore, be embraced as a positive. JANUARY 2022 GREEN MORTGAGES

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PARAGON

NO TIME LIKE T Jessica Bird and Richard Rowntree, managing director – mortgages at Paragon, discuss climate change and the finance of the future

n early 2021, the Department for Business, Energy and Industrial Strategy (BEIS) consulted on improving the energy performance of owner-occupied and private rented homes through lenders, in theory bringing to fruition the 2019 call from then Housing Minister Robert Jenrick for a “green housing revolution.” All of this, however, happened while the country was dealing with enormous upheaval and uncertainty, and while mortgage lenders battled to cope with home working, payment holidays, the stamp duty rush, and many other complications due to the pandemic. The government has made it clear, however, that there is no time like the present, and lenders such as Paragon have stepped up to lead the charge. Richard Rowntree, managing director – mortgages at Paragon, says: “As the dust settled, lenders had a good chance to sit down and look at those proposals, and think about the consequences.”

– whereby those with fewer properties, or who were more casual in their approach, have moved out of the sector – also means that more landlords are facing costs that multiply across a large portfolio. Rowntree notes that previously, the government’s grant scheme – providing payment contributions to those making energy efficient improvements – was a boon. Indeed, Paragon launched a deal to work in concert with this, just before the scheme was closed without notice. This, he says, typifies one of the fundamental problems facing those trying to provide green finance. “One of the problems lenders have is that we’re willing to finance these deals,” Rowntree explains. “But we want to make sure that the work is being carried out on the property to our own satisfaction. “This seems like a great opportunity for government grant schemes to do all the administration, provide a certificate for the grant, and then we can simply say, ‘we’re in’.”

LEANING ON LANDLORDS As with anything related to climate change, there is no one easy answer, and Paragon has had to consider some of the less savoury consequences and complications of taking the housing market towards a green future. For example, Rowntree explains: “One thing is we know the private rental sector [PRS] has seen 250,000 landlords exit since 2016, largely in part due to tax and regulation changes coming in. “It goes without saying that we support the push for greener homes but we feel that we need to consider the housing supply issue, and what we don’t want to see is another point at which crowds come out of the market.” Indeed, with changes to Energy Performance Certificate (EPC) requirements kicking in from 2025 for new tenancies, improvements to properties need to start imminently, and a pinch point for the PRS does appear to be on its way. The increased professionalisation of the BTL market

GETTING THE BALL ROLLING While government support has not always been reliable, that has not stopped Paragon from making forays into the world of green mortgage lending. “We were the first specialist lender to launch buyto-let [BTL] green products,” Rowntree says. “They are pretty basic in terms of what they do, and really reward those landlords that have energyefficient properties. So, if you have an EPC of A to C, you get a discount.” While a positive first step, Rowntree notes that lenders need to address a deeper issue that will prove key to eventually reaching those net zero targets. “While we’re pleased to be able to support investment that increases the proportion of energy efficient homes in the PRS, we know it’s not going to really address the retrofit issue, which is what we need to undertake here,” he explains. “We know that in excess of three million properties

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E THE PRESENT need to be upgraded, and over half of the PRS is below the right EPC level.” It is not simply a case of workshopping to find the right products, however. Paragon’s own surveys among landlord clients found that there is greater work that needs to be done in order to raise awareness and understanding in the first place. “One of the big problems we’ve got is education,” he says. “People just don’t know that these proposals are coming, and if they do – and they’re motivated – even then we see potential challenges in the bottlenecks of labour, technologies, and materials in order to get this done within the deadline.” This is all the more pointed when considering that the average tenancy in the PRS is four years. While existing tenancies have until 2028 to make upgrades, this deadline becomes somewhat redundant when considering most rented properties will become new tenancies before then. So, even those landlords who are aware of the impending deadlines may not see the full weight of the situation. All this sits in the context that the PRS is seeing record levels of demand, both as a result of recent pandemicrelated trends, and broader social movements. The issue of supply to meet this demand is inherently tied to the energy efficiency of the UK’s housing stock.

Richard Rowntree

COLLABORATIVE APPROACH While mortgage lenders have a key role to play in incentivising borrowers and providing the financial tools with which to take a greener approach, the issue does not lie at their feet alone. Rowntree says: “One of the things we are trying to do via the trade bodies is to get cross-industry consultation up-and-running – working groups that can work with technology companies, utilities companies, regulators and lenders, to join a vision collectively.” Paragon is looking forward to working on the next stage of its own green products in 2022, building on → www.mortgageintroducer.com

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INTERVIEW

PARAGON

“One of the things we are trying to do via the trade bodies is to get cross-industry consultation up and running” what it has assessed are the key issues to be faced moving forward, such as the need for huge efforts to retrofit the UK’s housing stock. For this to be effective, however, it needs to be supported by a cohesive and steady approach from the government, whereas at the moment there is uncertainty about how regulation and enforcement might shift at any time. “Whatever changes come in, we need to ensure there’s a robust regulation regime around them, because it’s not for lenders to manage that,” Rowntree adds. The BEIS report, which was meant to be returned at the end of 2021, has received approximately 700 pieces of feedback and its results have therefore been pushed back to later this quarter. This volume of responses alone shows the willingness of market players to work collaboratively, but also the presence of very real practical concerns about unintended consequences or things that could be done better. Although Rowntree notes that the feeling that government is providing a “listening ear” is a positive, it is difficult for lenders to implement strategies until the results of that consultation emerge, in case of a repeat of the issues around the removed grant scheme. LEARNING ON THE GO One of the other factors causing uncertainty in the market is that the science and understanding around green finance – and climate change in general – is still growing and changing. It is also the case that each property is likely to face unique challenges in increasing its energy efficiency. This is compounded by the fact that EPCs, while helpful, are not infallible, and there is a fair amount of uncertainty surrounding the idea of retrofitting in particular. For example, Rowntree explains, replacing a boiler with a more energy efficient one is a positive step, but is not guaranteed to improve a property’s rating without various other improvements alongside it. He adds: “There’s a lot to work through, and I think where another challenge comes in is that there’s so many options out there. “For example, there are over 100 suppliers of solar panels in the UK alone. As a landlord, how do you make your way through them to figure out which ones you should have? “There’s no one-stop shop to go to in order to get advice. Lenders also have long memories in terms of things like miss-selling in the past and performance

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promises that didn’t materialise.” The potential to fall into legal or reputational issues around this has caused many lenders to take a neutral stance in the past, going no further than providing the money. However, Paragon is clear that it aims to become an educator, rather than remaining passive. In addition to being quick to partner with the Green Finance Institute in the early stages, Paragon’s approach to this includes surveying landlords in order to gauge current levels of understanding, as well as providing consistent communication such as blogs, forums, podcasts, and working directly with brokers and landlords. Rowntree also says that the lender is looking at the idea of a multi-lender toolkit that might be provided through trade associations as an information hub and to point brokers and borrowers in the right direction. NEXT STEPS The current crop of green mortgages, Rowntree says, needs to be a building block rather than an end point. “I would say it’s a good start, and it’s well intentioned – that’s positive and should be applauded,” he says. “Will it be an end solution? Definitely not, we need to do a whole load more.” One area that needs to be considered is those properties where it is simply unaffordable to make the level of changes needed, particularly considering how much of UK housing stock is not fit for purpose. Rowntree notes that these concerns mean that any response from either government or the market needs to be robust and well thought through, to ensure property owners are not left out in the cold. While new housing being built largely fits with energy efficiency requirements, and modern methods of construction (MMCs) continue to grow in popularity, Rowntree says the focus has to be on improving current stock. “Potentially, unless a landlord makes these improvements, they won’t be able to rent their properties,” he adds. “We don’t want to scare people off or point fingers, but it is an awareness issue that we need to work on collectively as an industry.” Similarly, while EPCs are a good starting point for understanding the issue, the next step here has to be finding better and more comprehensive ways of assessing a diverse range of properties. As many have discovered over the past two years in particular, technology has an important role to play. Paragon is itself undertaking a multi-year transformation program, which looks at automating information gathering, boosting transparency and ensuring that processes work smoothly from the back office to the front. “What differentiates good lenders is consistency, transparency and speed,” Rowntree concludes. www.mortgageintroducer.com

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We’re committed to a greener future We’re dedicated to reducing our carbon footprint and are keen to support those who want to do the same, so we launched a number of new products and initiatives to support this:  For the most energy e�cient homes, we launched green mortgages.  We’re the �rst lender to trial the inclusion of a carbon o�set commitment on all our new purchase 95% LTV mainstream residential �xed rate mortgages, regardless of EPC rating.

Did you know?

We’ve already received enough applications for our carbon o�set products to o�set approximately 4,500 tonnes of carbon – the equivalent of 31 trips to the moon and back.

Find out more at leedsbuildingsociety.co.uk/intermediaries

REVIEW

GREEN MORTGAGES

Committed to a greener future Charles McDowell Martese Carton head of intermediary managing director – specialist mortgages, distribution, Leeds Building HTB Society

t Leeds Building Society, we’re dedicated to reducing our carbon footprint and we’re keen to support those who want to do the same. Last year we launched a number of new products and initiatives to support this:  For the most energy efficient homes, we launched green mortgages. Providing options for both residential and Buy to Let properties with an Energy Performance Certificate (EPC) rating of A-C or a Predicted Energy Assessment (PEA) rating of A-C, if the property is a new build.  We were the first lender to introduce a carbon offset commitment on all our new purchase 95% LTV

Ultimately, the end goal is for all mortgages to be green

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(loan to value) mainstream residential fixed rate mortgages, regardless of EPC rating. We do this by investing in offsetting (by purchasing carbon credits) the forecast environmental impact of an average home[i] during the initial fixed term of the mortgage. Since launching on 22 November 2021 we’ve already received enough applications for our carbon offset products to offset approximately 4,500 tonnes of carbon – the equivalent of around 15,000,000 car miles (petrol). This is equivalent to 375 trips around the equator or 31 trips to the moon and back. We were also one of the first lenders to join the Green Finance Institute’s Coalition for the Energy Efficiency of Buildings and our new products align with the Institute’s Green Home Finance Principles. WHAT DO BROKERS THINK?

We recently asked members of our broker panel for their views on green

products and whether they were noticing any changes in consumer demand or attitudes for this sector in the build up to COP26.  Brokers told us that 49% of their clients have made enquiries about Green Mortgages in the last three months showing a substantial interest in Green Mortgage Products.  93% of brokers expect demand for Green Mortgages to increase over the coming months and years.  The main difference brokers see between Green Mortgages and standard mortgages is that Green Mortgages offer a lower rate of interest (44%). There are two main ways financial providers can help brokers improve their knowledge on Green Mortgages:  Provide them with more detailed information on the green product range and criteria  Offer a simple and straightforward platform to help on-board new applicants and track applications. WHAT DOES THE FUTURE HOLD?

With government ambitions for homes to have an EPC rating of C or above for new tenancies by 2025 and for all properties by 2028, what are we doing to support your customers? Ultimately, the end goal is for all mortgages to be green, but we know there’s some way to go before we achieve this. We’ll continue to provide you with competitive residential and BTL green mortgage products for your customers. We’re currently looking into developing green remortgages and product transfers giving your customers even more options. We also recently launched our Greener Living section on our Knowledge Base, providing information to our members on how to live greener on both a short and long term basis, from ideas that cost very little, to investments that will be beneficial in the future. Using this resource, members can find out about what government schemes are available to help pay for green changes, such as the Electric Vehicle Homecharge Scheme and heat pump grants. JANUARY 2022

GREEN MORTGAGES

SUPPORTING the move to a low-carbon and sustainable lifestyle

Our innovative Green Home Mortgages rewards customers who are buying an energy-efficient new-build home directly from the builder or developer. We’ll offer them a lower rate on certain fixed-rate mortgages compared with the equivalent option from our standard range, as well as some exclusive Green products (subject to lending criteria) Find out more at barclays.co.uk/intermediaries

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REVIEW

GREEN MORTGAGES

Green is not a gimmick Craig Calder director of mortgages, Barclays

t’s now been over three years since Barclays became the first major UK mortgage lender to enter the green mortgage market, and it’s worth reiterating that this still had one of the fastest uptakes of any of our recent product launches. But the question is – how far has this product type come in the past three years? From a Barclays perspective, our commitment remains unwavering. As a company, we have made a commitment to align all our financing with the goals of the Paris Agreement, and have set an ambition to become a net zero bank by 2050. We are accelerating the transition to a low-carbon economy through our target of providing £100bn of green financing by 2030, and by investing £175m over five years in innovative green companies. Back in May 2021, we expanded the availability of our green home mortgages. As a result, this will now include any newly built property purchased directly from the builder or developer with an energy efficiency rating of 81 or higher, or an energy efficiency band A or B. For fully built properties, mortgage applicants will need to provide a valid Energy Performance Certificate (EPC) or a valid Predicted Energy Assessment certificate if the property remains under construction. Innovation, competition and accessibility remain key to future growth, so it has been encouraging to see a number of lenders introduce products aimed at helping landlords to improve the energy performance of their properties and drive standards across the private rented sector (PRS). We’ve also seen plenty of activity across the residential space, in a bid to www.mortgageintroducer.com

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encourage a stronger take-up of this particular product, but is this having the desired affect? In a panel discussion around the question ‘Green Mortgages: Are these the carrot or stick needed to improve overall ESG in the UK housing market?’ - a poll by Countrywide Surveying Services (CSS) found that 94% of brokers are yet to sell a green mortgage product. However, 39% of lenders suggested that they will have a green mortgage offering in place by the end of 2021. In addition, a recent study conducted by Mortgage Advice Bureau (MAB) outlined that whilst a quarter (25%) of mortgage lenders currently offer green or net-zero mortgages, of the lenders that do not currently have green mortgage products, 88% said they have plans to do so. MAB also sought to uncover how many consumers are being offered green mortgages. Of those who have either bought a property or remortgaged in the past 18 months, just 14% were said to have been offered a green mortgage product. The research also found that 69% of respondents had not heard of a green mortgage, and among this group, 45% revealed that they did not understand what the mortgage product was. When asked if they would pay more for a green mortgage, knowing they would be helping with sustainability and the environment, nearly two in five (38%) said they would.

A quarter (24%) of those who said they would consider paying more said it would depend on how much extra a green mortgage would cost them. Two in five (40%) said they would not pay more for a green mortgage, even knowing it would help the environment. Looking into the reasons why, 24% said they could not afford to pay any more, 20% did not want to have to pay any more for their mortgage, and 12% said they already pay enough. A further 16% said they should not have to pay more to help the environment, and 13% said they do not know how it will help. These two pieces of research make for some extremely interesting reading. The positive is that more green options are likely to emerge in 2022, and with an increasing number of lenders entering the market, competition will intensify. But the reality is that this has to translate into business sooner rather than later to have any real impact. As awareness rises around energy efficiency and carbon neutral choices in our homes and investments, it’s vital that they are being successfully integrated into the advice process. But this is not all on advisers. We, as an industry, need to invest more time, energy and resource to ensure that borrowers don’t simply view green mortgages as a ‘gimmick’ but as a valid and sustainable mortgage option. A challenge which we must all rise to.

Environmental factors should be integrated into the advice process

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REVIEW

GREEN MORTGAGES

Growing interest in greener properties George Gee commercial director, Foundation

here’s no doubting that we’re going to be seeing a much greater government focus on the UK’s housing stock, how its energy efficiency ratings can be improved, and how that might help the UK meet its carbon emission targets. For owner-occupiers, the focus on the potential allure of ‘green mortgages’, with more competitive rates for properties with a better Energy Performance Certificate (EPC) rating, appears to be growing. Homeowners are now inclined to improve the energy efficiency rating

of their home, particularly if such improvements might pay for themselves within a period of time. Our research of 300 individuals on their own housing aspirations and circumstances showed that 67% of all homeowners, or those who want to become homeowners, would consider a lower mortgage rate based on their property’s EPC rating an appealing element when looking at product features. Meanwhile, 48% of homeowners and prospective homeowners said they would consider improving the energy efficiency of their property in order to access a better mortgage product, if it paid for itself in five years, 5% said they would make green improvements to their property if it paid for itself in 15 years, and 24% said they plan to improve their property’s energy performance regardless.

Interest in greener property extends from owner-occupiers to landlords

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GREEN BUY-TO-LET

The growing interest in greener property is not just an area of interest for owner-occupiers, it also extends to the landlord community who are engaging with ways to improve energy efficiency since the introduction of new rules in 2016 requiring all rental properties to have an EPC rating of E or above. Another survey this year with BVA BDRC, this time of landlords about their rental properties, highlighted that the average landlord has 2.8 properties in their portfolio with an EPC rating worse than C, and only a third of landlords have portfolios entirely comprised of properties with ratings of C and above. Importantly, due to the legislation, 62% of landlords say they will be less likely to purchase properties with an EPC rating below C in the future. Around a quarter claim EPC rating compliance will make no difference to their likelihood of purchasing properties rated from D to G, but it is the larger portfolio landlords who are leading the way. Smaller landlords are significantly more likely to be unsure about the impact of the legislation on their future purchasing compared to their larger counterparts, equating to 12% for with between one and three properties, versus 7% of those with four or more. However, unless a borrower approaches you specifically asking for a ‘green’ mortgage, would you always check if they would be eligible for one? Anyone can check the EPC of a property on the government’s register. It is worth taking a moment to make that check for every case, because if the property your client is mortgaging has an EPC rating of A, B or C, you may discover that your client is eligible to apply for a ‘green’ mortgage – whether it be a residential or buy-to-let case – which is designed to reward those improving the energy efficiency of their properties. It’s still relatively early days for the green mortgage market, but it’s encouraging to see an array of lenders and advisers extending their expertise into this space, for both owneroccupiers and landlords. JANUARY 2022

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LENDING FOR A BETTER FUTURE Jessica Bird outlines Mortgage Introducer’s round-table discussion, covering current green mortgage trends, and how this market needs to evolve to more eﬀectively face the climate crisis

n many ways, it might be easy to assume that green mortgages – and climate change in general – is at the forefront of everyone’s minds at the moment. With COP26 dominating the news in the latter half of last year, and Energy Performance Certificate (EPC) deadlines looming for landlords, there are various avenues through which the subject is being brought into the daily consciousness. However, many people – both within the market and externally – would beg to differ, instead seeing green mortgages as a new and largely unheard-of topic. Indeed, the Mortgage Advice Bureau (MAB) recently discovered that 69% of the public had not heard of green mortgages, while only 25% of mortgage lenders currently offer them. Nevertheless, with 88% of other lenders looking to jump on the bandwagon in the near future, and the public setting increasing store in environmentally friendly practices, this is a topic that it is important for brokers to get to know. To this end, Mortgage Introducer asked representatives from Leeds Building Society, Foundation Home Loans, The Mortgage Mum, Ecology Building Society, Barclays, Coreco, John Charcol and finova Payment and Mortgage Services for their views. THE BASICS

Green mortgages cover a range of things – this might be a product that provides a chance to offset the carbon footprint of a house purchase, for example. At the moment, though, they primarily focus on rewarding buyers for purchasing properties with high energy efficiency ratings, or incentivising them to improve their EPCs. Green finance also has further ramifications, stretching into development projects, where it can be used to fund more environmentally friendly housebuilding techniques. James Chutter, corporate account manager at Leeds Building Society, says: “For me a green mortgage needs to have the purpose that it’s going to have a positive impact on the environment – a real impact on the environment. “It needs to really incentivise people to change their behaviour and to either build, buy, or renovate a property to a higher EPC rating. In the in the long term it’s then going to have a better impact on the environment.” Nicholas Mendes, mortgage technical manager at John Charcol, adds: “Typically [it is] new-builds that would benefit from a ‘green mortgage’, but you can make certain home improvements – like adding insulation, double glazing, etcetera – to improve your EPC rating.

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MARKET “You would need to pay to have a new EPC rating completed but this would allow you to benefit from a potential rate discount when remortgaging.” For Ian Rigarlsford, external affairs manager at Ecology Building Society, the important distinction is that something practical changes that would not have done so otherwise, in order for a green mortgage to be truly effective. Rigarlsford adds: “It’s worth mentioning why we have green mortgages in the first place. The UK’s Committee on Climate Change estimates that we need retrofit 28 million homes in the UK if we’re going to meet on that net zero target. That effectively means we need £250bn to invest in UK home upgrades by 2050, which is a massive task. So, the role of green mortgages and green finance in supporting that is absolutely key in terms of tackling the climate and ecological emergency.” CHEAP AND CHEERFUL While green mortgages aim to incentivise a more ecofriendly approach, and carbon offsetting attempts to build on an existing willingness to join in the effort against climate change, this market must still battle against a certain apathy. Nick Morrey, technical director at Coreco, says: “For your average person in the street, or even a broker, when they come to get a mortgage, unless they say they want a green mortgage, they’re always going to go with the cheapest option.” Often, he adds, green mortgages are not the cheapest product available, and therefore the vast majority of borrowers will opt for something else. Morrey also points to the fact that retrofitting homes comes with a price tag, which many borrowers are not prepared to pay, even when offered the current crop of green mortgage incentives.

“It’s all well and good the government saying EPC ratings have got to be A to C by 2025, but that goalpost is going to have to move” GRANT HENDRY

“A green mortgage needs to have the purpose that it’s going to have a positive impact on the environment – a real impact on the environment” JAMES CHUTTER “When they look at the cost of actually fixing their homes, unless they’re going to make that back on the mortgage, they just aren’t going to do it, certainly not in the numbers which are needed,” Morrey continues. For this reason, Morrey argues that the incentives and benefits must go further, and the industry must commit to more than “an extra £500 cashback off,” when a high street bank might provide a ‘normal’ mortgage at 1% cheaper overall on five years’ worth of fees. “We need to go a bit further in developing products where the upcoming generation is going to say ‘actually, that’s what I want to be a part of’,” he adds. “Products where the lender does something in the background to offset the emissions of the properties, understanding that people can’t upgrade them, is probably a step in the right direction.” At the moment, it could be argued that the crop of green mortgages available tends to reward those with properties that already fit the right criteria, rather than creating the impactful change they need to. Nevertheless, Erika Moreira Baker, mortgages product and propositions at Barclays UK, says that this is all part of the process. “Ultimately, buildings still contribute 23% of CO2 emissions in the UK, and we can’t move away from the fact that our housing stock needs to be retrofitted if the UK is going to get to net zero. Lenders, through the provision of green mortgages and through the provision of education to mortgage advisers and brokers, have a really important role to play. “At Barclays we were the first major bank that launched a green mortgage back in 2018. This year, we expanded our green mortgages, and we’ve had really, really good feedback from customers. “I think it’s really important to create an ecosystem, if you will, that rewards customers for having an energy efficient home – it’s an important step. →

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“We also have a duty to make sure we’re not giving people mortgages that realistically are on the borderline of being aﬀordable” SARAH TUCKER

“Is it going to solve everything? Absolutely not. There’s more that needs to be done from a government point of view and from other industry bodies, but having a steady, consistent provision of products that reward energy efficiency will definitely be part of the industry in the years to come, and I think we’re going to see more and more lenders looking at that.” HARDLY SO SIMPLE Grant Hendry, head of sales at Foundation Home Loans, points out that while EPCs might provide a useful framework through which to understand and quantify energy efficiency, the picture is rarely so simple. He says that for some properties, boosting the EPC is a matter of making simple tweaks, while for others it might be near impossible. From personal experience, he explains: “We built our house last year, but it was an E, and so when I had my EPC done we’d finished the house and we’d put an air source heat pump, we had done double glazed windows and everything else, and I got another EPC carried out, and we managed to get it to a B. “So there’s a lot of things that can be done that will make improvements – there’s a huge part where actually people can make very minor improvements to their house to get it potentially to that next level. “But if you’ve got a lot of Victorian houses that just potentially will never get to an A to C rating, that is going to be a huge concern. What’s going to happen with those properties? Are they going to be lettable? What’s going to be the solution?” Ultimately, considering the proportion of the UK housing stock that fits within this latter more problematic category, these are questions that the government will have to answer before it can have a hope of reaching its net zero targets. Hendry adds: “There’s a big piece of education that

needs to happen. It’s all well and good the government saying EPC ratings have got to be A to C by 2025, but that goalpost is going to have to move, or you’re going to have potential tenants who aren’t going to have a house that they can live in, so there’s a lot of work that needs to be done.” Mel Spencer, head of finova Mortgage Services, agrees that education must be a priority: “If you look at your typical broker, what type of clients are they dealing with? Are they a come in asking for a green mortgage? It’s probably highly unlikely. So who’s actually going to educate the customers on this? Is that down to the broker, the lender or the government? “If you look at the landlord piece, they’re trying to do it as cheap as possible to be able to let out that property. So, are they actually going to spend money on renovating? “As I speak to more and more brokers about green mortgages, I just feel that they find it to be more hassle than it’s actually worth, and that’s the issue.” Spencer adds that the focus must be on making it easier and more lucrative for brokers to bring green mortgages in as an option for clients. For Sarah Tucker, founder and managing director of The Mortgage Mum, this should start with providing information in a clear and accessible way, through case studies and fact sheets, for example, which might be distributed to mortgage clubs and networks. Rigarlsford notes that the solution to this education and awareness problem does not just lie with lenders. He says: “We need a national home retrofit strategy, which includes things like consumer education, consumer advice, reforming stamp duty to incentivise greener homes, and even slashing VAT on renovations. “The building regulations aren’t fit for purpose and need to be tightened, and then you’ve got the whole retrofit supply chain which needs to be built up.

“We need £250bn to invest in UK home upgrades by 2050… the role of green mortgages and green finance is absolutely key in terms of tackling the climate and ecological emergency” IAN RIGARLSFORD

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MARKET “But lenders are an important part of that, and that’s why Ecology has been providing green mortgages for years.” For Rigarlsford, there needs to be a sea-change whereby green mortgages do not just focus on specific situations, such as those clients that are building or renovating their homes, but are also scaled up and become a solution across the full gamut of property finance. NOT JUST NEW-BUILDS Among customers who have either bought a property or remortgaged in the past 18 months, MAB found that just 14% had been offered a green mortgage product. This seems an incredibly small amount, considering the urgency of the issue. However, Spencer suggests that there may be pockets of the market where things are progressing better.

“Taking that first step – taking out a green mortgage or making a small improvement to their home – makes people feel good about what they’ve done” ERIKA MOREIRA

“That 14% - is that among new-build brokers or brokers that deal with majority of the market? I think that’s the whole market,” she explains. While some brokers, especially those dealing with new-builds, might be better equipped to understand and offer greener options, Spencer says that this figure highlights a serious gap in education across the whole of the market. “There’s not enough awareness from brokers, even that they can offer or should be offering green mortgages, or should be having that conversation at all,” she continues. “The same research found that not enough people even know what a green mortgage is, or they found it confusing, and even when explained, they still didn’t really understand what they needed to do or what comes next.” While there needs to be a widespread education

piece undertaken both within and outside the market on the use of green mortgages beyond the obvious, Spencer adds that it is also important for brokers to be able to admit to a lack of knowledge, and ask lenders about the benefits of these products for their clients. Hendry adds that for landlords looking at improving existing properties, there is also a fear that any work being done on a property comes with risk, either that something could go wrong, or that down the line accepted wisdom might change as to what works to make it more energy efficient. There are many methods and providers out there, and it can be daunting to consider every option for improving a property’s EPC, especially considering some of them – although needing to be done – will not work in isolation. It is understandable that this might feel like an insurmountable task. Hendry adds: “A lot of the time that you see is landlord customers going, ‘I don’t know what I should or shouldn’t be doing - what is the right thing for the longevity and protection of this property?’” The issue of longevity and looking past new-builds can be applied to the whole of the UK’s housing stock. Rigarlsford says it is incredibly important that, rather than just incentivising people to go after the same small number of – often newly built – A to C-rated properties, green mortgage must focus on helping those in the worst performing properties to upgrade. COST AND AFFORDABILITY While an attractive rate or discount on a mortgage product might be an incentive to either improve a property or buy one that is more energy efficient in the first instance, there are other factors that should form part of the calculation. Mendes says: “As we spend more time in our home, we are more aware of our surrounding and the benefits of living in a cost-effective home.” The primary issue here is lower energy bills. While buying a new-build home might be more expensive in the short-term, customers can hopefully factor in lower long-term costs. The same goes for retrofitting to boost an existing property’s EPC rating. Landlords, in theory, could use this to make their properties more attractive to renters looking to save on their bills. This is particularly pertinent in the current economy, with inﬂation on the rise, and therefore bills set to increase in the near future. However, it is not quite →

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MARKET that simple, and the expense of making these changes is still a considerable sticking point in making the costeffectiveness argument. Mendes says: “Cost and affordability is the key issue. Looking at renewable energy, solar panels for example to help offset the costs of electric, but the grants have almost disappeared, and the costs of installation are still incredibly high. “When you look at how long it would take in terms of yearly savings against the costs of installation, it could almost take a decade to see the cost saving benefits. The same goes for the installation of lofts and other areas of the home to improve the EPC ratings.” Moreira Baker notes that the bank has recently done its own customer research around the subject of sustainability and energy efficiency within the home. She says: “What we learned from the respondents was that sustainability and energy efficiency isn’t top of mind when it comes to their home. “A lot of people don’t see their homes as a source of emissions, and there are other concerns that are more important to them at that time when they’re moving home or planning to do work on their homes. “The education piece is essential, and what we’ve learned is that costs and bills are definitely really important to customers, so that’s something that’s

“As I speak to more and more brokers about green mortgages, I just feel that they find it to be more hassle than it’s actually worth, and that’s the issue” MEL SPENCER

that we need to talk more about and be more upfront about, in order to help educate customers and brokers as well.” Moreira Baker adds that there might also be an element of this education piece that looks beyond the money and outlines the benefits in terms of living environment. “There’s also the benefit of having a comfortable, cozy home that people can associate with energy efficiency as well,” she explains. Rigarlsford agrees, adding that energy efficiency can help combat the issue of fuel poverty. However, he notes that it is important not to overstate the effect on bills, which for many might be fairly marginal, and instead focus on the potential for reduced mortgage costs, which is a more tangible incentive. For similar reasons, Tucker feels that energy efficiency should not be taken into account in lenders’ affordability

GREEN MORTGAGES JANUARY 2022

“We need to go a bit further in developing products where the upcoming generation is going to say ‘actually, that’s what I want to be a part of” NICK MORREY

calculations, even though this might prove a positive incentive for many borrowers. Tucker explains: “Yes, there could be energy bills decreasing, and so technically their monthly spend may be better, but we shouldn’t really be relying on that, because – as we’ve seen from our own energy bills – that’s completely changing and out of our control. “We have a responsibility, certainly, to try and contribute to the climate change issue, but we also have a duty of responsibility to provide affordable mortgages and to make sure we’re not slipping into old habits of giving people mortgages that realistically are on the borderline of being affordable to them. “They should be kept as two separate responsibilities in my opinion, and that’s not the right way to reward people. “There’s financial incentives, certainly, but it doesn’t make actual sense to say that, because they’ve got a green property they can afford more than a person who hasn’t.” So, this is about finding the right balance of incentives in order to encourage people to focus on energy efficiency, without simply throwing everything at a borrower, which could ultimately be to their detriment. Nevertheless, Rigarlsford adds that there are some instances – such as with properties built to the standards of the Passivhaus Trust – where the difference in energy bills is so stark that it can be incorporated into affordability calculations with minimal risk. These cases are few and far between currently, but might suggest a future trend for the industry. In the meantime, some lenders are considering a partial approach, which acknowledges the affordability benefits of increased energy efficiency, but also takes into account the uncertain nature of this measurement. This, Hendry adds, is where tools such as Open Banking can be helpful. SMALL STEPS While green mortgages are perhaps in need of further evolution in order to be truly fit for purpose, Moreira Baker does feel that they at least provide a framework around which the conversation about energy efficiency can begin. “They’re a great way of getting people thinking about their homes in terms of energy efficiency,” she says. www.mortgageintroducer.com

ROUND TABLE

MARKET “As well as rewarding them for choosing an energy efficient home or upgrading their homes. “The other thing that we’ve learned along this journey is the importance of small steps – your customers don’t have to go all the way and make their home net zero. Taking that first step – taking out a green mortgage or making a small improvement to their home – makes people feel good about what they’ve done and that enables them to take the next step, and so on. “With recycling, you start with a few things and then you end up not being able to throw anything plastic in the bin, and I think that’s the journey that we’re helping to take people on one step at a time, getting to a much better place for the whole of the housing stock in the UK.” Spencer suggests another small step that might make a considerable difference in terms of the perceptions of green mortgages, namely that rather than having a mortgage’s green status left in the notes section of sourcing systems, which is currently often the case, this should be one of the main criteria or tick-boxes. Although many lenders are highly knowledgeable about this issue, there is much work to be done among the broker community. The first step, Tucker agrees, is to make green finance more than a footnote or a hard to find web page. Another step – though somewhat larger – that might drive up the popularity of green mortgages is for the government to provide capital incentives for those lenders that are extending green finance, Moreira Baker adds. COMBATTING CARBON For those lenders that are making forays into the green market, it needs to go beyond just EPCs. For example, Chutter outlines that Leeds BS has invested in carbon offsetting for the short to medium-term, whereby money is invested in net positive projects in order to outweigh the negative impact of a business or individual’s emissions. “It’s invested into schemes that are designed to take carbon away from the atmosphere,” he explains. “So, it’s very different to the other sorts of products where borrowers are given an incentive or a discount.” Products that factor in carbon offsetting cater ideally to a more engaged type of borrower, who has a sense of their own impact on the environment, and actively wants to reduce it, rather than those who are simply motivated by a discount and the potential for lower energy bills. “The customer has to be very much aware of what carbon they’re producing in their own property and want to really go for it,” Chutter says. In addition, these products can be aimed at those borrowers with lower deposits, who have saved less and are therefore unlikely to be able to make the necessary improvements to boost their EPC ratings now – those at 95% loan-to-value (LTV), for example. www.mortgageintroducer.com

“Then, when they come out of that 2, 3, 5 or 10- year product, they won’t have actually added any carbon to the atmosphere, and then hopefully they’ll be in a better position,” Chutter continues. “And hopefully we as an industry would be in a better position then to offer them a new mortgage that’s going to be more fit for purpose to improve their EPC rating.” This approach is particularly important while the wider education piece is in its infancy. Just because people are struggling to understand the specifics about green finance does not mean that lenders have to wait to have a positive impact. This will also allow lenders to make green finance part of their DNA, rather than a small element of what they do.

“Cost and aﬀordability is the key issue. Looking at renewable energy, solar panels for example” NICHOLAS MENDES

Morrey says: “If the public can’t – or won’t – do what they need to do, is there something that the lender can do on the borrower’s behalf to offset, or even make a positive contribution to, what’s going on in the world? “I’ve spoken to a few lenders in the past year who were thinking of doing a green mortgage, knocking a bit of money off, giving £100 cashback, but why not go and support a project instead that maybe cleans up the UK rivers or buys back areas of the Amazon so they stop putting palm tree oil farms up?” In theory, a lender could then simply continue offering their usual suite of products, while making it clear what work is going on in the background, regardless of the borrower’s EPC or mortgage type. This helps move past the issue that for many borrowers, outside of those in the privileged position to build their own properties, improved energy efficiency is currently a pipedream. These borrowers should not be left out of the feeling that they are contributing to positive change, even passively, and with increased awareness comes the growing likelihood that these borrowers will do more once they are in a position to. Morrey adds that as part of this, lenders should take a holistic look at where their money comes from and where it goes, in order to shore up their green credentials and help borrowers to feel that – just by using them to access the same mortgage as they would have before – they are joining the green revolution. Chutter concludes: “We’re not just trying to do it from a commercial or from a reputation point of view, we are actually doing it to make a difference.”  JANUARY 2022

GREEN MORTGAGES

STATISTICS

GREEN MORTGAGES

KEY FACTS AND FIGURES 38%

25% of mortgage lenders currently offer green or net zero mortgages, while 88% of the rest have plans to do so Source: MAB

of people would pay more for a green mortgage knowing it would be helping with sustainability and the environment, but 40% would not Source: MAB

94% of brokers are yet to sell a green mortgage product, while 92% of surveyors are yet to value a property with an Energy Performance Certificate (EPC) rating of A Source: CSS

46%

90% of brokers expect interest in green mortgages to rise, and 57% have seen a significant increase compared with a year ago Source: Leeds Building Society

67% of homeowners would be in favour of a lower mortgage rate based on their property’s Energy Performance Certificate (EPC) rating Source: Foundation Home Loans

of homeowners are seeking to carry out improvements in the next three years to make their home more sustainable Source: CSS 26

GREEN MORTGAGES JANUARY 2022

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EBS

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Building a greener society Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Community and commercial mortgages offered by Ecology Building Society are not regulated by the Financial Conduct Authority. Financial Services Register No. 162090.

For Mortgage Intermediaries use only. Details are correct at time of going to print.

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