The truth about ‘green’ mortgages, the net zero product for energy efficient homes

If you’ve never considered how “green” your home is, you may soon be forced to, as the Government’s target to hit net zero by 2050 depends on homeowners being willing to take action. 

While it’s not yet law, it’s expected all homes will have to get an EPC (Energy Performance Certificate) rating of at least ‘C’ by 2050. However, the average UK property currently has a rating of ‘D’, according to the ONS, meaning the majority of homeowners must make improvements to make their homes more energy efficient. 

In a bid to incentivise people, some mortgage lenders are offering ‘green mortgages’ – products that can be used to purchase an energy efficient property (often new-builds), or used to help finance green home improvements. 

However, as Telegraph Money reveals, the deals aren’t always very appealing.

What kind of green mortgage rates are on offer?

Only a few banks and building societies offer green mortgages at the moment, but several big names such as Barclays, Halifax, Nationwide and NatWest are among them.

Typically, green products tend to be slightly cheaper than the same lender’s non-eco offerings. Mark Harris of broker SPF Private Clients said: “This small discount is a kind of reward for meeting the environmentally friendly criteria.”

According to Mr Harris, at the time of writing NatWest has a five-year fixed green deal with a preferential rate of 4.12pc, compared to a rate of 4.17pc for its core product, (both at 40pc deposit, and with a £995 fee). 

Barclays has a two-year fixed green deal at 4.53pc, compared to a rate of 4.64pc on its core product, (both for a 25pc deposit).

You might assume green mortgages would come with “best buy” rates, but this is not the case.

Nick Mendes of John Charcol, a mortgage broker, said: “While banks may be keen to talk about how they are doing their bit as eco-friendly lenders, rates tell a different story.”

For example, one of the cheapest green products is Virgin Money’s five-year fix, at 3.81pc with a £995 fee, requiring a minimum 35pc deposit. 

“But, as with most green offerings, this deal is out-performed by a standard product,” Mr Mendes added. 

“HSBC has a five-year fix (minimum 40pc deposit) at 3.76pc with a £1,499 fee. Elsewhere, Virgin Money has a five-year fix (minimum 35pc deposit) at 3.79pc, with a £1,495 fee. 

“Borrowers should not assume that opting for green will mean they get the best rate. Most market-leading deals will be on non-green products.”

Alternative green incentives

You may not be successful in finding a green mortgage with a market-leading rate, but some lenders offer alternative green perks. 

David Hollingworth of L&C Mortgages said: “Lenders are recognising the Government’s push for homes to be made more energy efficient. For example, Halifax has extended its green range so that those looking to remortgage or buy are eligible for £250 cashback if the property has an EPC rating of A or B.”

The lender also offers up to £500 cashback to some borrowers looking to carry out eligible home improvements, such as fitting a new boiler.

Mr Hollingworth added: “Nationwide has a ‘Green Reward’ mortgage offering £250 cashback to someone buying a property with a B rating, rising to £500 for a property with an A rating. It also offers preferential rates on two and five-year fixes to those looking to borrow additional funds for energy-efficient changes.”

More recently, Nationwide also launched an interest-free loan to a select few green-minded borrowers for making green improvements to their homes.

Elsewhere, Barclays offers up to £2,000 to existing mortgage holders who carry out green home improvements. Saffron Building Society also has a retro-fit mortgage, which rewards the homeowner with a rate reduction for improving their property’s energy efficiency. 

The cost of energy efficiency improvements

Improving a property’s energy efficiency doesn’t come cheap. You could typically expect to pay between £7,000 and £13,000 to get a heat pump installed, according to the Energy Saving Trust, while the average domestic 3.5 kW solar panel system could cost around £5,500. 

Aside from lenders’ help, there’s a Government grant where households can apply for £5,000-£6,000 towards the cost of a heat pump – although funding could run out of cash three years early. But the work could still be worth taking on.

Mr Mendes said: “You need to look at the other benefits of having an energy-efficient home. Not only will this mean lower utility bills, but it could also help when you come to sell, as a higher EPC rating could add value to your property.”

In addition, we’ve seen new rules introduced, requiring landlords to improve the energy efficiency of their homes to a minimum of a C rating by 2028, or risk facing fines. Stealing a march on any potential new legislation for owner-occupiers might be no bad thing.

Mr Harris added: “The potential savings will not happen overnight. A more efficient boiler will save you money compared to an old one, but it will take several years to recoup the initial outlay. Plus some motivations extend beyond the financial cost, and are about working to create a better, cleaner and more energy-efficient future.”

What about talk of EPCs not being up to the job?

The problem is that, with the chair of the Climate Change Committee, Lord Deben, recently describing EPCs as “not fit for purpose”, borrowers may be worried about going to a lot of effort and then finding the rules change.

In his letter to the Department for Levelling Up, Housing & Communities, Lord Deben said current EPC ratings measure a property’s energy costs, rather than its energy efficiency. They also only include certain aspects of energy consumption, and the fact that the ratings are based on numbers between 1 and 100 – rather than real-world units – it’s very difficult to compare against a property’s actual energy consumption. 

Mr Mendes said: “An EPC is generalised, and some recommendations may be inappropriate for old UK homes. Others can boost an EPC rating, while actually increasing carbon emissions.”

The reverse is also true. In some cases, even the installation of a heat pump – viewed as the future of low-carbon heating – can harm an EPC score, potentially reducing a property’s value. 

At the same time, we have to acknowledge that, for now at least, the EPC is the model we have. 

Mr Harris said: “Lord Deben has recommended improving the current EPC mechanism, as developing and testing a new tool could take time within what is already a tight schedule.”