Today, homeowners in the UK who are looking for a green mortgage have more options than ever before. Eleven UK banks and building societies have launched green mortgage products since the beginning of 2020, with five of those entering the market in the first four months of 2021.
This is still a nascent market, but the opportunity for lenders is huge. The UK Committee on Climate Change estimates that £250 billion needs to be invested in UK home upgrades by 2050, which means there is the potential for significant capital flows in green mortgages in the coming years. Meanwhile, there are other levers in play, with policy makers, NGOs and financial regulators increasingly demanding that lenders examine the energy efficiency of their mortgage portfolios.
However, there are considerable hurdles to overcome, particularly to boost the financing of energy efficiency retrofits in the UK, which will be essential if the UK government is to meet its goal of upgrading all UK homes to an EPC rating of C by 2035.
To date, many green mortgage lenders in the UK offer homeowners discounted interest rates for buying properties that are already energy efficient, but this accounts for a tiny slice of the UK’s housing stock. Only 3% of UK homes have an EPC rating of A or B, according to the latest quarterly release from the Ministry of Housing, Communities and Local Government.
Meanwhile, the Climate Change Committee has found that 19 million UK homeowners live in properties with an EPC rating below C. Rather than rewarding buyers for purchasing the very small number of homes that are already green, it will be crucial for more lenders to develop green mortgages and other loans that incentivise homeowners to retrofit their properties. These retrofit mortgages and loans must be offered at scale if the UK is going to successfully upgrade enough homes to reduce carbon emissions throughout the built environment.
More UK homeowners also need to be informed of the benefits of retrofitting their homes, which is currently creating something of a chicken and egg situation. It’s harder for lenders to create innovative new products without understanding the potential demand, while more homeowners are unlikely to retrofit their homes without a consistent national policy framework that supports retrofits at scale and the availability of preferential financing to pay for them.
The Green Finance Institute has published an in-depth examination of the UK’s green mortgage market, as part of the ongoing insights and thought leadership of the Coalition for the Energy Efficiency of Buildings (CEEB). Drawing on the collective knowledge of the CEEB’s colleagues and members, and including interviews with key lenders in the green mortgage market, this article will address the evolution of the UK’s green mortgage market, explore the market-led innovation that is currently underway, and the policy and regulatory support required to ensure that it fulfils its promise.