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Mind the Gap

Higher energy efficiency makes mortgage repayments more affordable, because less money spent on fuel means more money available for other bills. This is the core message that inspired the LENDERS project to explore how the energy performance of a home could be included in calculations of mortgage affordability.

The UK has the largest mortgage market in the world, with £234bn lent in 2016. At today’s launch of the project’s final report, BEIS Minister Claire Perry urged the mortgage industry to maintain the UK’s leading reputation for financial innovation and grasp the opportunity that improved home energy performance offers. She pointed out that higher energy efficiency improves and protects the collateral against which mortgage providers are lending, and improves home-owners’ ability to repay their debt.

The project has developed a tool that estimates the energy costs of a given property more accurately than the methods currently used by the mortgage industry. The tool can be used to show home buyers how the energy efficiency of their chosen home will affect their monthly fuel bills, and it could also be used in full mortgage affordability calculations, potentially affecting the maximum amount people can borrow – increasing this for more energy efficient properties and decreasing it for those with worse energy performance.

The ability to borrow additional money on a more efficient property will only affect directly the minority of borrowers who actually borrow close to their maximum mortgage amount. But the bigger prize is the potential effect on homebuyer perceptions: the option to borrow more on a given property could increase its attractiveness to buyers, whether or not they actually take up the larger mortgage amount; this in turn could lead to faster sales of more efficient properties and eventually to higher prices.

The Minister is clearly looking to industry to play a leading role in building demand for energy efficiency investment. And – to an extent – industry is willing to respond, as evidenced by the active involvement of mortgage lenders in the project.

However, the report acknowledges that making changes to affordability calculations is a significant process change and could take the industry some time, although promotion of the existing stand-alone tool by lenders and estate agents could begin now. The key question is: will either of these things happen?

Is the potential for additional mortgage lending to those who currently take up the maximum loan available to them a big enough financial incentive for lenders? Probably not.

Is the longer-term increase in lending on higher value energy efficient homes (together with a possible decrease in lending on less valuable inefficient properties) any incentive at all?

And is the ‘improvement in, and protection of, collateral’ that the Minister identified a clear enough motivator for lenders to invest time and money in promoting this new information to home buyers and in changing their systems?

If the answer to any or all of these questions is ‘no’, then there may well be a large gap between government’s expectations of an industry response and what actually happens, which would be a real opportunity missed. The questions then are: how do we close this gap? And whose job is it to do this?

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