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9 May 2021

Could you save money by taking out a 'green' mortgage?

Lenders offering cheaper rates and cashback deals for energy-efficient properties

Home buyers could benefit from cheaper rates and cashback incentives by taking out a 'green' mortgage deal.

Green mortgages are becoming increasingly popular, as banks move towards more sustainable lending and home buyers prioritise environmentally-friendly lifestyles.

Here, Which? explains how green mortgages work and offers advice on how you could qualify for a cheaper rate or cashback when buying a home or remortgaging.

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What is a green mortgage?

Green mortgages are mortgage deals available to people who buy environmentally-friendly homes or make energy-efficient home improvements to their property.

These deals have been around for several years, but they're only now beginning to take off - with research by Defaqto showing there are now 26 green mortgages on the market.

Green mortgages usually offer cheaper rates when you buy a property that conforms to a specific energy standard. For example, lenders will often require that the property achieves an energy performance certificate (EPC) rating of A or B.

Green mortgages are most commonly available on new-build homes, but they can also be available for properties that have been renovated to meet high efficiency standards.

How do green mortgages work?

There are three main types of green mortgage:

  • Deals that offer a lower rate for people who buy energy-efficient properties.
  • Standard mortgages that offer cashback to people who buy energy-efficient properties.
  • Mortgages that offer cheaper rates or cashback when people make green home improvements.

Lower rates for green homes

Barclays and NatWest offer cheaper rates to people buying energy-efficient homes.

The Barclays Green Home Mortgage is available on new-build properties with EPC ratings of A or B. Buyers can borrow at up to 75% loan-to-value.

NatWest's Green Mortgage is available on new-build or existing homes with ratings of A or B. It is available up to 85% loan-to-value and comes with £250 cashback.

Cashback deals for green homes

Nationwide offers cashback on its standard range of mortgages for people who buy energy-efficient homes. The lender's 'Green Reward' is available on new and existing properties with an EPC rated either A or a high B (86 or above).

The reward is £500 cashback for properties with an 'A' rating, or £250 for those with a high 'B' rating (86-91). Cashback is available on Nationwide's full mortgage range.

Foundation Home Loans offers a similar deal for landlords who buy properties rated C or above. Those who qualify can benefit from a lower product fee and £750 cashback on the standard mortgage range.

Cheaper rates or cashback for home improvements

Again, Nationwide is the biggest lender offering this type of deal. It's 'Green Additional Borrowing' product allows homeowners to apply for an additional £5,000 to £25,000 to make green home improvements at a reduced rate of 0.75%. This deal is available at up to 85% loan-to-value.

Kensington's EKO cashback mortgage offers £1,000 cashback to people buying or remortgaging. To qualify, borrowers must improve their home's EPC rating by at least 10 points within 12 months of taking out the deal.

Are the rates better on green mortgages?

If you're already with a bank that offers green mortgages, some of the deals above could be a great way of accessing more money to fund home improvements.

But if you're looking to buy a new-build or existing property with an EPC rating of A or B, is it worth taking out a green mortgage or sticking to a standard product?

Defaqto crunched the numbers and found that there are a couple of two-year fixed-rate green mortgages that are cheaper than the best deal on the standard market.

On five-year fixes, standard mortgages are cheaper at the moment, however, in almost all cases, green mortgages were among the lowest rates available.

Two-year fix

Loan-to-valueCheapest green mortgageCheapest standard mortgageDifference
60%1.13% (£250 cashback)1.24%The green mortgage is 0.11% cheaper
75%1.38% (£250 cashback)1.31%The green mortgage is 0.07% more expensive
80%2.49% (£250 cashback)2.65%The green mortgage is 0.16% cheaper
90%3.62%3.29%The green mortgage is 0.33% more expensive

Source: Defaqto

Five-year fix

Loan-to-valueCheapest green mortgageCheapest standard mortgageDifference
60%1.28% (£250 cashback)1.27% (£250 cashback)The green mortgage is 0.01% more expensive
75%1.64% (£250 cashback)1.53%The green mortgage is 0.11% more expensive
80%2.82% (£250 cashback)2.73%The green mortgage is 0.09% more expensive

Source: Defaqto

Will green mortgages become more common?

It's highly likely that green mortgages will become more mainstream in the next few years, as consumers and lenders take a greater interest in climate change and sustainability.

The Climate Change Committee (CCC) says 19m of the UK's 29m homes have an EPC rating of below C. To meet its emissions target by 2050, the CCC says the government should ensure all homes have a rating of at least C from 2028.

The Department for Business, Energy and Industrial Strategy (BEIS) says mortgage lenders could play a key role in the government hitting its target.

In a recent report, it said lenders should consider reviewing their rules to encourage green mortgages and offer additional borrowing to help homeowners make green improvements.

With this in mind, we can expect to see more of these types of deals appear in the coming years.

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.

EPCs 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 some 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: