Green mortgages are a relatively new concept but more and more lenders are starting to offer them. So, what are they and how do they work?
What is a green mortgage?
A green mortgage is a type of mortgage that incentivises property buyers to purchase an energy-efficient home. Incentives will vary depending on the lender and the type of home you buy. But often you’ll be given a more competitive mortgage rate or cashback.
On top of this, because the property is more energy efficient, you’ll also save money on energy bills.
Why do lenders offer green mortgages?
With the government aiming to reach net zero carbon emissions by 2050, all homes are expected to have an Energy Performance Certificate (EPC) of at least band C by 2033 (where possible).
An EPC is required whenever a home is bought, rented or sold and it indicates how energy efficient the property is. The most energy-efficient homes are rated A, while the least energy-efficient homes are rated G.
Mortgage lenders have now got in on the act by rewarding homeowners who either buy an energy-efficient home or take steps to make ‘green’ improvements to their existing home. Both NatWest and Nationwide have set themselves the target of ensuring half of their mortgage customers’ homes have an EPC rating of at least C by 2030.
Green mortgages are also considered a lower investment risk for lenders. That’s because energy-efficient homes typically cost less to run, which means homeowners will pay less for their energy bills and are less likely to struggle to repay their mortgage. Green homes can also go up in value due to the improvements made.
How do green mortgages work?
Green mortgages offer customers a discounted interest rate or cashback if they buy an energy-efficient home or if they are remortgaging a property that already conforms to a certain energy standard. Usually the property will need to have an EPC rating of A or B to be eligible for the discount or cashback.
Some lenders will also offer cash rewards or mortgage discounts to those who carry out certain energy-efficient improvements on their existing home, such as upgrading the heating system, installing double-glazing for windows or getting solar panels.
Who offers green mortgages?
Several lenders now offer green mortgages. These include:
High street lenders
- NatWest. Offers a reduced rate on 2-year and 5-year fixed rate mortgages if you buy a property or remortgage and your home has an EPC rating of A or B. Maximum LTV of 85%.
- Barclays. Offers a lower 2-year or 5-year fixed mortgage rate if you’re buying a new-build property from the builder or developer and it has an EPC of A or B. Existing Barclays customers can also apply for a cash reward to help with the cost of installing solar panels, insulation, a heat pump and more.
- Halifax. Offers £250 cashback if you buy an energy-efficient home or already own one and you’re remortgaging. Your property must have an EPC rating of A or B. Maximum LTV of 95%.
- Nationwide. Offers £500 cashback if you’re buying a home with an EPC rating of A or £250 for a home with a B rating. If you’re looking to fund energy-efficient home improvements to your existing property, Nationwide also offers 0% interest on borrowing for the first 2 or 5 years. You can borrow between £5,000 and £15,000.
- Virgin Money. Offers a discounted 2-year or 5-year fixed mortgage rate if you buy a new-build home with an EPC rating of A or B. Also offers £250 cashback for existing customers looking to make improvements to their home, as long as you spend at least £2,500 on these improvements.
Non-high street lenders
- Kensington Mortgages. Offers £1,000 cashback when you improve your home’s energy efficiency rating within 12 months of taking out a mortgage.
- Saffron Building Society. Offers a rate reduction if you improve the EPC rating of your home within 6 months of purchasing it or remortgaging.
- Gatehouse Bank. Offers a reduced rental rate on a 2-year or 5-year fixed rate product if you buy an energy-efficient home with an EPC rating of A or B. This is a sharia-compliant bank.
- Swansea Building Society. Offers a discount off the lender’s standard variable rate if you have a property with an EPC rating of A or B.
How much do green mortgages cost?
How much a green mortgage will cost will depend on the lender, the type of mortgage you take out and how much you’re borrowing. It’ll also depend on whether there are any mortgage fees.
It’s crucial to calculate the total cost of your mortgage for the term of the deal, including any fees, before you apply. So if you’re taking out a 2-year fix, work out what your monthly repayments will be and how much this will cost in total over the 24 months.
To make sure you’re definitely saving money with a green mortgage, it’s sensible to compare this figure with how much it would cost to take out a non-green mortgage deal. In some cases, you might find that a non-green mortgage is actually cheaper, despite not offering a discounted rate or cashback.
Why would you choose a green mortgage?
Some of the reasons you might want to choose a green mortgage include:
- You could benefit from a cheaper rate (but check this is definitely the case)
- You might benefit from cashback to help pay for energy-efficient home improvements
- Green mortgages can encourage you to make energy-efficient improvements that reduce your energy bill and benefit the environment
- Improving your home’s energy efficiency could also boost its value
There are also concerns that it could be harder to get a mortgage on properties with a low EPC rating in the future. This means that buying a more energy-efficient home with a green mortgage or making energy-efficient improvements to your existing home could pay off in the long run.
Who is eligible for a green mortgage?
To be eligible for a green mortgage you will need to be buying or remortgaging a property with an EPC rating of A or B. Alternatively, you will need to show you’re planning to make improvements to your property to boost its EPC rating and energy efficiency.
On top of this, you will also need to meet the lender’s general mortgage eligibility criteria. For example, lenders will look at your income and outgoings to determine whether or not the mortgage is affordable, as well as examine your credit history.
Pros and cons of green mortgages
Pros
- You could enjoy a cheaper mortgage rate
- You could benefit from cashback to put towards home improvements
- You might benefit from lower energy bills
- Making certain improvements could increase your home’s value
Cons
- You could find a cheaper ‘non-green’ mortgage deal elsewhere
- You’ll usually need a property with an EPC rating of A or B to qualify
- The mortgage itself won’t be green – in some cases, the lender that offers it might be investing in industries that are damaging to the environment
Bottom line
Although there are benefits to applying for a green mortgage, it’s important to be aware that the mortgage rate you get might not be any lower than other mortgage deals on the market. However, buying a more energy-efficient home or making improvements to an existing property can still benefit the environment, and you could reap the rewards through lower energy bills and a home that maintains its value instead.
Frequently asked questions
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