Could you save by taking out a 'green' mortgage?
Homebuyers and landlords could benefit from cheaper mortgage rates and cashback incentives by taking out a 'green' mortgage.
Green mortgages are becoming increasingly popular, with lenders beginning to turn their attention to landlords ahead of new energy rules being introduced in the private rented sector.
Here, we explain how green mortgages work and offer advice on how you can qualify for a better rate when buying a home or making energy-efficient improvements.
What are green mortgages?
Green mortgages are home loans that offer cheaper rates to borrowers who purchase a property that meets certain energy-efficiency standards.
Deals are usually available on new-build properties with Energy Performance Certificate (EPC) ratings of A or B, though homes that have been renovated to improve their energy performance sometimes qualify, too.
Green mortgages have become more readily available over the last year, as banks undertake a drive to make their loan books more sustainable.
Recent research by Defaqto found that the number of green mortgages on the market increased by a fifth between October 2021 and April 2022, led by a big uptick in the number of green buy-to-let deals.
How much can you save with a green mortgage?
Green mortgages were once a niche proposition, but they're now available from some of the UK's biggest mortgage lenders, including Halifax, Barclays and NatWest.
Rates on green mortgages are often cheaper than standard deals, but the savings aren't huge.
NatWest and Royal Bank of Scotland (RBS) currently offer the cheapest green mortgages on the market. Their two and five-year fixes are both available with a 0.1% reduction on their standard rates.
Both of these deals compare favourably to standard mortgages. The two-year fix at 60% loan-to-value is priced at 2.72%, making it the third cheapest mortgage on the market. The five-year fix at 2.73%, meanwhile, is cheaper than any other equivalent deal .
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Green buy-to-let mortgages soar ahead of rule changes
Defaqto's research found that there are now nearly 300 'green' buy-to-let mortgages on the market, compared to just 85 last October.
This rise has been driven by upcoming energy changes in the private rented sector. By 2025, landlords will need to ensure their properties have EPC ratings of between A and C at the start of a new tenancy. These rules will be extended to existing tenancies by 2028.
The new rules have resulted in some landlords shifting their focus towards investing in energy-efficient properties. The specialist lender Paragon Bank reported a 38% increase in the amount it lent on properties with EPCs between A and C in the six months to April 2022.
As with the residential market, green buy-to-let mortgages only offer small savings on standard rates, but at a time when finances are stretched, they could still be worthwhile.
Other types of green mortgage
The deals we've described above are the most common type of green mortgages, but some lenders also offer green cashback deals and preferential rates when borrowers take on energy-efficient home improvements.
Green cashback mortgages
These are standard mortgages that offer a cashback incentive for people buying an energy-efficient home. There are several examples of this types of deal:
- Nationwide's 'Green Reward' offers £500 cashback if you buy an EPC 'A' rated property, or £250 if you buy a property with a high 'B' rating. The offer applies to any of Nationwide's standard mortgage range.
- Halifax's 'Green Living Reward' offers £500 cashback for borrowers who make improvements such as adding insulation or improving heating systems, or £1,000 if they install a ground or air source heat pump.
- Leeds Building Society offers £500 cashback when buyers purchase a property with an EPC rating of A-C and take out one of its green mortgage products.
Green additional borrowing
These deals allow existing homeowners to get better rates or cashback when they borrow additional money to make energy-efficient home improvements:
- Nationwide allows customers to borrow an additional £5,000-£25,000 at a reduced rate. At least 50% of the loan must be spent on energy-efficient improvements.
- TSB allows customers making energy-efficiency improvements to borrow additional cash at a lower rate. Customers must borrow at least £10,000 to be eligible.
- Kensington's EKO cashback mortgage gives borrowers £1,000 cashback if they improve their home's EPC rating by one band within 12 months of taking out their mortgage.
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What is an EPC rating and how do I improve mine?
As we mentioned earlier, lenders generally base green mortgage eligibility on energy performance certificate (EPC) scores. EPCs grade the energy performance of your property.
They provide a current and potential score out of 100. The score is used to give a grade of between A and G - for example an A rating requires a score of 92 or higher, while a B rating requires 81-91.
EPC ratings last 10 years, and an up-to-date EPC must be provided when properties are marketed for sale.
There are many short and long-term measures you can take to improve a property's EPC. The EPC certificate will make general recommendations to improve your home's energy efficiency and reduce your energy bills.
If your property doesn't already have it, loft insulation is a good place to start. It can cost a couple of hundred pounds, is relatively straightforward to install and can pay for itself in less than five years.
Other energy-efficient improvements often recommended on EPCs include: