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Listen nowCan you save money with a 'green' mortgage?
New 0% deal for green home improvements but bigger green home loans can be
pricey
Green mortgages are a rapidly evolving concept designed to reward borrowers living in energy-efficient homes - but the deals aren't always appealing.
As a result, efforts to increase their uptake by offering 'meaningful' incentives are being made. This week, Nationwide is launching a 0% interest loan for borrowers wanting to make sustainable changes to their home.
However, Which? analysis of green mortgages for bigger home loans show rates are currently the same or pricier than standard deals.
Here, we explain how green mortgages work, what's being done to increase their uptake, and compare the rates on offer.
What is a green mortgage?
Green mortgages are home loans that are meant to offer cheaper rates to borrowers who buy environmentally-friendly homes or make energy-efficient home improvements to their property.
If you're buying or living in a home with Energy Performance Certificate (EPC) ratings of A or B, you'll likely qualify for a green mortgage.
Or, if you are carrying out green renovations to your property - such as installing solar panels or heat pumps - you could be offered a loan with a discounted interest rate or cashback incentives.
Nationwide to launch 0% loan for green home improvements
From 1 June, borrowers who have a mortgage with Nationwide Building Society could secure a 0% loan to make energy efficiency improvements to their home.
Work carried out with the loan can include installations such as solar panels, heat pumps, electric car charging points and loft insulation. Windows and boilers can also be upgraded.
The building society says the new Green Additional Borrowing product will be available to 5,000 households to begin with.
Customers can borrow between £5,000 to £15,000, and all of the loan must be used for green improvements - not structural upgrades such as an extension.
The best rate on a £15,000 loan taken out over five years right now is 4.8%, so Nationwide's deal is compelling.
To qualify, existing Nationwide borrowers will need to have a mortgage with a maximum loan value of 90% of the purchase price of their property.
The interest-free period will last either two or five years. Once the term is up, the loan repayments will revert to Nationwide's standard variable, which currently stands at 7.74%.
Henry Jordan, director of home at Nationwide, said: 'It’s clear to us that only meaningful incentives will help shift behaviour. So, by launching this latest product we can test and understand whether offering 0% interest will encourage members to make the necessary green home improvements, where the costs of finance may have, until now, discouraged them.'
- Find out more: the best personal loans
How do green mortgages compare?
While green finance for home improvements looks to be improving, green mortgages are less competitive.
Green mortgages are marketed as loans which reward energy-efficient homeowners. However, in reality, the same or better interest rates can normally be found with standard home loans.
The tables below show the cheapest green and non-green interest rates currently on the market for first-time buyers and movers.
Two-year fixes
| Loan-to-value (LTV) | Cheapest green mortgage rate | Cheapest standard mortgage rate |
|---|---|---|
| 60% | 4.51% - NatWest | 4.29% - Metro Bank |
| 75% | 4.51% - NatWest | 4.44% - First Direct |
| 80% | 4.64% - Halifax | 4.59% - First Direct |
| 90% | 4.89% - Nationwide Building Society | 4.82% - HSBC |
Source: Moneyfacts. Rates correct as of 24 May 2023
Five-year fixes
| Loan-to-value (LTV) | Cheapest green mortgage rate | Cheapest standard mortgage rate |
|---|---|---|
| 60% | 4.12% - NatWest | 3.99% - Metro Bank |
| 75% | 4.17% - NatWest | 4.06% - HSBC |
| 80% | 4.24% - Nationwide Building Society | 4.19% - First Direct |
| 90% | 4.44% - Nationwide Building Society | 4.44% - First Direct |
Source: Moneyfacts. Rates correct as of 24 May 2023
- Find out more: the cheapest mortgage rates.
Will green mortgages become more common?
According to the Green Finance Institute, the green mortgage sector has increased significantly over the past five years. In 2017, there were just two products available but by September 2022 there were 51.
It's highly likely that green mortgages will continue to become more mainstream as consumers and lenders take a greater interest in climate change and sustainability.
As part of the government's net-zero vision, it's expected that all homes will need to achieve an EPC rating of at least C by 2050.
Figures from the Office for National Statistics (ONS) show that around 60% of all homes currently have a rating of D or lower, so mass upgrades are due in the coming years.
'Green mortgages have a key role to play in future'
The mortgage regulator, the Financial Conduct Authority (FCA), foresees a greater focus on green mortgages from lenders as they seek to meet their decarbonisation targets.
It says green mortgages can 'play an increasingly significant role' in helping homeowners make sustainable upgrades to their homes.
Speaking at a finance conference last month, the FCA's director of retail banking, David Geale, said: 'We want to see ongoing innovation from lenders, with compelling incentives that will influence consumer decisions as they seek to improve the energy efficiency of their homes.'
He stressed that the regulator will do what it can 'to support and encourage the industry in this relatively new, and rapidly evolving space'.
£4.1 million funding for green home finance projects
Twenty-six different green finance schemes aimed at reducing household carbon emissions have been awarded funding from the government.
Small-scale providers are among those to benefit from the £4.1 million cash pot, which hopes to boost the sustainable finance offering for both homeowners and buy-to-let landlords.
A full list of projects to receive a share of the funding is detailed on the government website.
Lord Callanan, minister for Energy Efficiency and Green Finance, said: 'We are supporting these organisations to develop fresh and innovative ways of helping more people get better access to energy efficiency measures, such as loft insulation, double glazing and heat pumps.'
