The way ahead for the UK’s green mortgage market

The Green Finance Institute looks at the evolution of this growing market to date and the innovation, policy and regulatory levers that will ensure it fulfils its promise

greenfinanceinstitute.co.uk Green Mortgages Green Finance Institute

number of properties that are already national policy framework that supports Introduction energy efficient, more mortgage retrofits at scale and the availability of products and other loans must target preferential financing to pay for them. the retrofit market to fund the In this article, the Green Finance transformation of the UK’s existing Institute (the Institute) will look at the housing stock on the scale required. evolution of the UK’s green mortgage he UK’s nascent green mortgage This lack of demand and supply has market to date, in both the retrofit and Tmarket is showing signs that it is created something of a chicken and green build space, explore the market- ready for lift off. Encouraged by the egg problem. It’s harder for lenders to led innovation that is currently innovation of their peers in this space, create innovative new products without underway, and the policy and eleven banks and building societies in understanding the potential demand, regulatory support required to turn the the UK have launched green mortgage while more homeowners are unlikely to residential mortgage funding currently products since the beginning of 2020 retrofit their homes without a consistent trickling into this promising market into alone. a flood.  The opportunity for lenders in this space is huge. The UK Committee on Climate Change has estimated that £250 billion needs to be invested in UK home upgrades by 2050, which means The evolution of the market there is the potential for significant capital flows in green mortgages in the coming years. Meanwhile, there are cology Building Society became the example, a 0.25% discount is applied to other levers in play, with policy makers, Efirst UK lender to offer green Ecology’s standard variable rate for NGOs and financial regulators mortgages back in 2006, when it each Energy Performance Certificate increasingly demanding that lenders introduced its C-Change discount (EPC) grade that the property improves. examine the energy efficiency of their mortgages. Through this product, “We’ve been involved in initiatives since mortgage portfolios. Ecology offers discounted mortgage early 2000s to try to support the green Yet significant challenges remain, rates to homeowners building or mortgage market,” says Paul Ellis, including a lack of demand from converting sustainable homes, or Ecology’s CEO. “Our C-Change homeowners to undertake energy undertaking retrofits and energy discounts try to drive behavioural efficient retrofits on anything like the improvements. changes by giving customers a price scale needed for the UK government to For sustainable homes and retrofits, signal that improvements are worth meet its goal of upgrading all UK homes the size of the discount that doing.” In total, Ecology originated £39.3 to an EPC rating of C by 2035. With many homeowners receive depends on the million of new green mortgages in 2020 green mortgages focusing on the small outcome once the project is completed. and Ellis thinks that number will grow For retrofit discount mortgages, for consistently over the next two years. 

2 Green Mortgages Green Finance Institute

 For a long time, Ecology was the UK’s homeowners who made certain energy introduce green mortgages in 2020, and only green mortgage lender, until 2018, improvements to their homes. The more government initiatives soon when Barclays launched its Green Home scheme was a breakthrough for the followed. In November 2020, the UK Mortgage, which gave buyers of new market, as it reassured lenders that the government announced that homes with EPC ratings of A or B a amount of homeowners undertaking companies would be mandated to discounted interest rate on two-year energy efficient retrofits of their homes report their climate risks, in line with the and five-year fixed rate mortgages. It would continue to grow, creating, in turn, Task Force on Climate-related Financial became the first high street bank to increased demand for green mortgages Disclosures (TCFDs), by 2025. launch a green mortgage, and in doing and other retrofit loans. The Bank of England has announced so, demonstrated to other major The Green Finance Institute launched that it will begin climate-related stress mortgage lenders that structuring and its Green Home Finance Principles in the tests on UK banks and insurers in June launching a green mortgage was both same month, supported by a number of this year and in February 2021, the UK possible and also commercially viable. lenders and the Loan Market government’s Department of Business, The following year, new government Association, which provide financial Energy and Industrial Strategy finished policies provided more support to the institutions with a consistent and its consultation period on the proposed market. In July 2019, the UK government transparent methodology for allocating policy that UK lenders disclose the launched its Green Home Finance finance towards retrofitting works in UK energy efficiency of their mortgage Innovation Fund competition, which homes. portfolios. Since the beginning of 2021, awarded grants to three new green A combination of these drivers, plus Paragon Bank, Foundation Home Loans, finance projects that incentivised competition from other lenders, led Kensington Mortgages, Santander and energy efficiency retrofits in homes. Nationwide Building Society, Newbury Halifax have all launched their first This was followed by the launch of the Building Society, Just Group, Saffron green mortgage products.  short-lived Green Home Grants Scheme, Building Society, NatWest and in September 2020, providing grants for Monmouthshire Building Society to

Advisor at Santander. “The EnergyFact Today’s green report aims to be more inclusive. Many of our mortgage customers can get a mortgage tailored assessment of how to improve their home.” Eventually, Santander landscape would like to use the bank’s scale to negotiate better energy deals or retrofit he table below shows the number of prices for its customers. TUK lenders that currently offer green All lenders interviewed for this article mortgages today and the different agreed that financing the types of product that are available. transformation of the UK’s existing These are broadly divided between housing stock through energy-efficient those that offer discount mortgage what improvements homeowners can retrofits, rather than rewarding buyers rates to customers building or buying make to reduce their home’s carbon for purchasing the very small number of homes that are highly energy efficient; footprint, the work needed to achieve existing homes that are already green, and those that offer extra lines of credit, this, and how they can save money on is going to be crucial to increase green discounted mortgage rates or cash their energy bills, while making their mortgage volumes and reduce carbon back on existing loans to homeowners home warmer. emissions in the built environment. Only that improve the energy efficiency of For Santander, this is part of a 3% of UK homes have an EPC rating of A their homes. strategy to improve the average EPC or B, according to the latest quarterly A third flavour is Santander’s rating of its entire mortgage book, release from the Ministry of Housing, EnergyFact home energy reports, where 55% of its customers live in Communities and Local Government, introduced last month with Countrywide homes with an EPC rating of D. “The next while the Climate Change Committee Surveying Services, available to 10 years will be critical to decarbonise has found that 19 million UK customers that want to move their the heating of UK buildings and green homeowners live in properties with an existing Santander mortgage to a new mortgage propositions that only target EPC rating below C. property or take on additional borrowing new-build homes with A or B EPC ratings NatWest, which launched its first for home improvements on an existing are not going to move the needle,” says green mortgages last October, offering Richard Hirst, Climate Change Strategy mortgage. The EnergyFact reports show 

3 Green Mortgages Green Finance Institute

 Company Product Name Launch Requirements of product Eligibility and further information Name Year Discount to Additional Energy Property Cashback existing borrowing Efficiency bought mortgage or for existing of property must be new low- customers must be energy interest rate improved efficient mortgage

Ecology Building Society C-Change Discount 2006 • 3 types: Energy Improvements Discount, Retrofit Discount, Sustainable Homes Discount. • 95% of their residential mortgage customers already eligible. • Discount applied upon completion of the project.

Energy Improvements 2018; • Often accept projects that standard lenders may not. Mortgage updated • Discounts provided from the date evidence of energy improvement works are completed. 2021 • If eligible, C-Change Discounts (above) can apply.

Barclays Green Home Mortgage 2018 • Must be a new-build property (with an EPC A or B) from a select group of house builders. • EPC or PEA must be submitted at the stage of application.

Nationwide Building Society Green Additional Borrowing March • Only available to existing customers. mortgage 2020 • At least 50% of borrowing must be spent on energy efficiency improvements.

Newbury Building Society GoGreen Further Advance July • Available to existing borrowers to transfer their existing mortgage onto. 2020 • At least 50% of borrowing must be spent on specific energy efficiency improvements.

Just Group Green Lifetime Mortgage July 2020 • Feature available for the 'Just For You Lifetime Mortgage 2.5 LTV' series. Feature • Reduces the standard interest rate by 0.10% for the duration of the loan. • EPC must be submitted at the application stage. All customers will receive £50 cashback when the advance completes to contribute to cost of EPC.

Saffron Building Society Retro Fit Mortgage Sept. • Proof of energy efficiency upgrades (to minimum EPC E) required. 2020 • If proved, customers will be given a discount on their monthly mortgage payments for the remainder of the two-year deal.

NatWest Group Green Mortgages Oct. • £250 cashback paid to solicitor on day customer drawdowns mortgage. 2020 • Valid EPC rating of A/B required.

EeMAP Initiative Aim to develop an “energy Ongoing • An EU-wide market-led initiative intended to channel private capital into energy efficiency investments. efficient mortgage”

BNP Paribas Green Mortgage Since • Collaborating with E.ON to develop and pilot such a product, under the EeMAP Initiative umbrella. 2018

Monmouthshire Building Green Mortgage – under Pilot • To pilot product in low-carbon Sero Homes' housing development Parc Eirin, South Wales. Society the VALUER project launch 2020

Paragon Bank Green further advance February • Four products for portfolio landlords who have applied and been accepted for a Green Homes Grant. range 2021 • All four products have no application fee, no product fee and include a free valuation.

Foundation Home Loans Green Reward Mortgage February • Available to portfolio and non-portfolio landlords for their properties with an EPC C or above. Designed to 2021 reward landlords who have made environmentally-friendly choices. • £750 cashback upon completion and a reduced 0.75% product fee. • If work has been done, they can re-mortgage immediately rather than wait the usual 6 months.

Kensington Mortgages eKo Cashback Mortage February • Available to all individuals across all properties in the UK. 2021 • Evidenced increase of at least 10 Standard Assessment Procedure (SAP) points required to qualify. • Up to 12 months to make the energy improvements and claim cashback reward. • £1000 cash paid upon qualification. Also comes with free valuations, and free legal advice on remortgages.

Halifax Green Living Reward March • £500 cashback when homeowners make one or more eligible home improvements using a TrustMark 2021 registered supplier; • Customers must have registered for the reward by 31st May 2021. • Have created a home Energy Saving Tool for customers to create a personalised action plan for their homes. • Existing customers and new customers all eligible.

Santander EnergyFact Report March • Santander, in partnership with Countrywide Surveying Services, has launched EnergyFact - a free, practical 2021 home energy report. The free report provides existing Santander mortgage customers with guidance to improve the energy efficiency of their home

 4 Green Mortgages Green Finance Institute

 discounted interest rates and cash back to customers purchasing new homes The current policy and with an EPC rating of A and B, plans to extend its range over the next couple of regulatory landscape years. “We’re really pleased with the uptake in demand from customers since the launch and we want to also he way to bolster demand and until 2025. Ellis does not consider the make this product available to Tcapacity in this market is through Future Homes Standard to be equivalent customers remortgaging their home,” consistent, robust, long-term to Zero Carbon Homes and would have says Lloyd Cochrane, NatWest’s Director government policy and regulation, preferred the former initiative to be of Proposition, Home Buying and which is why many organisations retained. “We could have been building Ownership. “We also want to develop a viewed the cancellation of the Green zero carbon homes now and developing product so people with existing Homes Grant Scheme last month as a the supply chain already, but that was mortgages can borrow more to make step in the wrong direction. Although abandoned,” he says. “Instead, we’re energy-efficient investments in their there were problems with the actually building homes now which we home.” He adds that the bank is also administration of the scheme, including will have to retrofit to meet the Future building a site for customers to receive a shortage of qualified contractors, the Homes Standard.” a list of the top things they can do to short-lived scheme did provide lenders However, banking and building save money and improve their carbon with more certainty of demand and society members of the Institute’s emissions based on their postcode. encouraged green mortgage innovation. Coalition for the Energy Efficiency of Although Ecology Building Society has “The government’s decision to cancel Buildings (CEEB) generally welcome the always funded retrofits, renovations and the programme will have ripple effects current government proposal that UK conversions, Ellis says that the building across the sector, but we believe it’s a mortgage lenders disclose the EPC society has been making more loans clear example to government that ratings of their portfolios as one of the that improve the existing housing stock collaboration with all parts of the value positive long-term policy changes that over the last couple of years. It chain is critical in the design and are needed. introduced a new variable rate implementation of future grant “It raises that EPC metric in the renovation mortgage this February, schemes,” says Emma Harvey, awareness of boards and will drive offering deeper discounts to Programme Director at the Green action throughout the industry,” says homeowners doing home renovations Finance Institute. Cochrane, who adds that NatWest has that improve the EPC rating of the The 2019 Conservative manifesto an ambition for 50% of its mortgage property. The result is that Ecology has committed over £9 billion of investment book to have an EPC rating of C or done as much lending in the first three to retrofitting homes, so bringing more above by 2030. These energy efficiency months of 2021 on renovations as it did of that funding forward is now essential. disclosures could also spur the creation in the whole of last year. The government’s announcement that of more innovative financial products to Yet while the need to finance home public funding for the ‘able to pay’ help homeowners retrofit their properties, retrofits is clearly there, for many green housing market will be limited in future whether those are green mortgages, mortgage lenders, it’s still hard to assess makes it even more critical for the unsecured retrofit loans or other the extent of customer demand. “Most private sector to deploy capital into the products. people in the UK understand their next retrofit and green built space. Nevertheless, there is concern that car or the one after that needs to be As Ellis points out, past government the imposition of target EPC ratings electric or a hybrid, but don’t have the funding programmes that supported could have unintended consequences, same awareness that they need to energy efficient homes have also been potentially discouraging the improvement make their home more energy efficient too short and aligned to annual of properties with low EPC ratings and to reduce the carbon from their home in budgets. Without the certainty of them penalising the owners of those homes. the same way,” says NatWest’s continuing, it is hard for homeowners, “The concern is that this could drive Cochrane. “Homeowners also need and even contractors, to commit. poor practices from lenders, who start to clarity on what the solutions are, with Ellis cites the example of the UK cherry pick those borrowers with access to trained retrofit professionals government’s Zero Carbon Homes plan, preferential EPC ratings,” says Mick that do work to required standards so which would have made all new homes Taylor, Head of Proposition Development, that consumers have faith in the supply carbon neutral by 2016. The plan ended Regulation and Industry Liaison at chain. These issues are interrelated. The in 2015 and was replaced by the UK Santander. “That would create a two- finance can be there, but the demand Future Homes Standard, which will tier system where homeowners with and the capacity to fulfil retrofits isn’t ensure that new homes produce 75% to lower ratings would find it harder to yet.” 80% less carbon, but won’t be enforced move to a new mortgage provider.” 

5 Green Mortgages Green Finance Institute

 The outlook

here are many more steps the UK Tgovernment could take to stimulate demand for retrofit financing, as outlined by the Coalition for the Energy Efficiency of Buildings (CEEB) in its report last May. Stamp duty that is linked to EPC ratings, where homeowners pay less for buying more energy efficient properties, or receive a stamp duty rebate for undertaking an energy efficient retrofit within a set period, is one idea. Mandatory minimum energy efficiency standards, which already exist Finance Innovation Fund, could help that property,” says Santander’s Taylor. in the private rented sector, could be financial institutions that are also “That’s a challenge that will require a extended to the sale of owner occupied dealing with COVID -19 and the Libor collaborative approach across properties, where purchasers of and Brexit transitions address potential industries and where the Institute’s properties that do not meet the capacity constraints. Building Renovation Passport working standard could negotiate the property Beyond supportive policy and group will be useful.” price to pay for the energy efficiency regulation, industry-wide standards If these hurdles can be overcome and renovations they will subsequently have must be applied throughout the green the right policies and regulations to perform. Removing or reducing VAT mortgage market to maintain its enforced, lenders see significant growth on energy efficiency measures could be consistency and integrity and ensure potential for this embryonic market over another stimulus. that lenders do not greenwash the next five years, with a wide variety of A concerted public awareness mortgages for CSR benefits. The lenders, large and small, supporting a campaign would prompt more Institute’s Green Home Finance diverse range of products. As well as homeowners to recognise the Principles provide an important financing for new and existing green opportunities to make energy efficient framework here, outlining how loan builds, retrofits and the provision of improvements to their homes. As the proceeds should be used, how energy reports, more products could CEEB outlined in its March report, improvements should be assessed, how emerge that are sensitive to the wide providing homeowners with bespoke funds should be managed, and how range of environmental characteristics Building Renovation Passports would activity should be reported. The in UK properties and the many unique enable them to identify and undertake evolution of this market must produce a scenarios that homeowners experience. the most impactful renovations on their race to the top, both in standards and in Lenders willing to invest in product property and access qualified innovation. innovation, underwriting and the contractors who can do the work. Early This will require collaboration expansion of their green mortgage book steps have been taken by the industry to between government and lenders, today will play a key role in shaping develop these solutions, including energy suppliers, retrofit contractors, what this young, exciting and critically Santander’s EnergyFact report. homebuilders, and other stakeholders to important market will look like in years to On the supply side, there are many share best practices and develop an come, and ultimately, the influence it will steps that could stimulate the green ecosystem of providers that can finance have on the decarbonisation of UK mortgage market. A national loan and implement green home homes. guarantee scheme, an interest rate improvements at scale, and ensure offsetting scheme, or favourable capital those implementations are verified and treatments for green mortgage loans, measured. could all help banks and building “To comply with the Green Home societies offer more attractive interests Finance Principles, we need to validate rates to customers and boost loan how our funds are being used, then volumes. More funding to support new verify that the retrofit has resulted in an product innovation, like the Green Home improvement to the energy efficiency of 

6 Green Mortgages Green Finance Institute

 Q&A

with Emma Harvey, Programme Director, Green Finance Institute

efore joining the Green Finance Institute, Emma Harvey worked for several different divisions of Barclays Bank, and worked Bon the launch of the bank’s pioneering Green Home Mortgage. She discusses below how the UK’s green mortgage market has evolved since then and what further initiatives will support its growth.

Before we launched the Barclays’ The EU Energy Efficiency Mortgages mortgage, research in the US had also Initiative (EEMI) is also important demonstrated a link between energy because it was the first initiative to bring efficiency and the probability of default together multiple stakeholders to on mortgages that were secured develop the energy efficient mortgage against those properties. Subsequently, market. The end goal of the initiative is the Bank of England has published to establish an energy efficient research that verifies this correlation. mortgage securitization market across That’s important, because if the Europe. It also provides a very useful mortgage has a lower probability of definition of what a green mortgage is, default, the bank holds less capital which the Institute’s Green Home against that loan, and can offer lower Finance Principles point to as one of the How did Barclays’ first green mortgage interest rates without eroding its return market’s best practices. in 2018 influence the development of on equity. That can lead to a self- this market? sustaining green mortgage market, What else can spur product innovation As the first major UK high street bank to where lower risk loans mean that at lenders? bring an innovative product to market, lenders are able to offer lower pricing. It’s really important to gain buy-in at the the Barclays green mortgage created a senior level, while also empowering the ripple effect across the industry. It As the market grows, this benefit may bankers that develop these products. demonstrated that you can launch a wash itself out, because this correlation Financial institutions need to be ahead green mortgage, offer customers a may be a socio-demographic indicator, of demand for green mortgages, lower interest rate to support green rather than the result of people saving particularly to fund home retrofits, so choices, and verify a property’s high- on their energy bills each month, but it’s that finance is not a barrier but rather an energy performance rating. Before the still an important trend to note. enabler when demand increases. There Barclays product, it was also needs to be a culture of innovation and challenging to point to market demand What other factors, other than UK a willingness to try new ideas, in order to when developing a green mortgage. policy and regulation, could encourage catalyse new financial solutions. Now other organisations can see there the development of this market? is demand and a supply of green The work of the Coalition for the Energy It’s also about harnessing the finance coming forward, which makes it Efficiency of Buildings at the Green enthusiasm of young bankers who are easier for banking and financier Finance Institute has already catalysed really passionate about climate and see members of the Coalition for the Energy and stimulated market-led innovation. a fantastic opportunity to do something Efficiency of Buildings to innovate. Since it was established in 2019, its good. That’s why we see so many demonstration projects, developed with talented professionals in the early Was it also important to demonstrate members, have shown that financial stages of their career moving into that green mortgages could be institutions can generate commercially sustainable and green finance. Let’s commercially viable? attractive, risk-adjusted returns by capture that enthusiasm and get it Yes, because even a couple of years financing the retrofit market. By bringing moving in the retrofit space.  ago, there was the misnomer that together 300 members, drawn from all ‘green’ meant a negative impact to the sectors of the economy that support the bottom line. Instead, we’ve seen green retrofit value chain, it has also fostered products in the retail space, and the cross-sector collaboration, which is critical, capital and syndicated loan markets, and ensured that the financial solutions which really do generate attractive it recommends work for all parties. returns.

7