The UK's drive to boost energy efficiency of homes works its way into favourable financing.
The government’s drive to improve the energy efficiency of UK homes is beginning to work its way into favourable mortgage terms.
Mortgage lenders are coming under increasing pressure to improve the energy efficiency performance of the homes in their portfolio (i.e. those they have offered mortgages on), following a government consultation that looked into the issue.
The government has since mooted a proposal for lenders to voluntarily agree to meet a portfolio average energy efficiency rating (EPC) of C by 2030, the results of which have yet to be published.
However, some lenders are already making commitments. One of the well-known mainstream banks, for example, has pledged that 50% of its mortgage book will be at or above an EPC rating of C by 2030.
EPC is an energy efficiency rating scheme for homes. Properties are rated between A to G, with an A rating being the most energy efficient.
The trend is resulting in lenders offering more favourable mortgage terms to incentivise borrowers to buy energy efficient homes, says Nathan Bakhbakhi, a finance specialist in Knight Frank Finance’s new homes team.
“We are seeing energy efficiency becoming very prevalent in lenders’ setting of mortgage rates. This is particularly the case in the new build sector because these properties typically already meet the required criteria to qualify for a “green mortgage” – specifically ECP ratings of A-C or A-B, depending on the lender.
“The interest rates for these green mortgages are significantly lower than interest rates for non-green mortgages. So, it can make a big difference to the cost of borrowing for clients, and is incentivising more buyers to choose a newer home.”
“It is currently possible to secure a two-year fixed rate green mortgage at around 0.1% less than the next best mortgage rate available to someone who doesn’t have a green property,” says Nathan.
“On a £500,000 property in the current market, that would work out as an extra cost of around £20 a month, which over two years would total £500*. And we expect these margins to increase overtime as more lenders introduce green mortgage options.
Similar, favourable terms can be secured on second hand properties too, but borrowers would need to make sure they had the EPC rating for the home as part of their application, to prove it qualifies
“It’s really important that you have the EPC to hand when looking for a green mortgage with a second-hand home. For new builds, where this information isn’t available – because, for example, it hasn’t been built yet – we can make certain assumptions after talking to the developer. But if in doubt, it’s always best to get in touch with a specialist broker who can talk through your options.”
If you’d like to find out more about whether you’re eligible for a green mortgage, please speak to our finance specialist Nathan Bakhbakhi, who will be able to help you identify the best financial approach for your circumstances.
*Correct as of 1 June 2022