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?
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.
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.
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.
Several lenders now offer green mortgages. These include:
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.
Some of the reasons you might want to choose a green mortgage include:
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.
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.
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.
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