First Time Buyer
Green mortgages branded a ‘gimmick’ as rates are HIGHER than standard deals
Green mortgages are designed to offer borrowers preferential terms, rates or incentives such as cashback when buying a property that meets certain environmental standards.
They’re typically aimed at more energy-efficient new builds, but can also be used for properties which have been renovated to improve their Energy Performance Certificate (EPC) rating.
While brokers say the green mortgage concept is “good” and the industry’s come a long way since their launch in 2018, they claim the reality is that lenders are merely “ticking boxes” when it comes to their green credentials.
There are currently no industry-wide rules or regulations when it comes to green mortgage offers or their pricing, and while the number of lenders and products branded ‘green’ has risen in the past five years, the offers rarely stand-out to environmentally-conscious homebuyers, brokers claim.
But there is a rule for homeowners applying for a green mortgage, according to the Mortgage Advice Bureau, and that is they must be able to provide their lender with “clear evidence that any retrofitting home improvements have been undertaken by a TrustMark (Government endorsed quality scheme) registered business.”
Indeed, best buy data from Defaqto revealed that rate differentials are minimal, or even non-existent, while the typical £250 cashback has been branded “pointless” by brokers amid runaway inflation in the current cost-of-living crisis.
As an example, on 5 January, Defaqto’s best buy tables revealed that a two-year standard mortgage (60% LTV) had a rate of 4.74% with £490 in fees. The equivalent green mortgage was priced at a higher 5.12% and offered just £250 cashback.
A 95% LTV two-year standard mortgage was priced at 5.7% (£0 fees), while the equivalent green mortgage was priced at 5.82%, again with just the £250 cashback incentive.
Turning to five-year deals, a standard mortgage (60% LTV) offered 4.39% with £490 in fees while the green mortgage stood at 4.59%, offering just £250 cashback.
For those with a smaller deposit (95% LTV), the top ‘deal’ was priced at 5.09%, again offering just £250 cashback.
In fact, across all LTV tiers across two- and five-year terms, 10 of the 12 green mortgage best buys were more expensive than their standard counterparts.
A scour of the best buys today by Defaqto reveals out of the 12 categories, green mortgages were more expensive based on rate in eight categories, while one was lower, but offered no cashback, and three were the same, save for offering £250 cashback.
Katie Brain, consumer banking expert at Defaqto, says: “New build specific green mortgage products have been competitive in the past however, with interest rates much higher than they were a year or so ago there isn’t as much difference in interest rates for standard mortgage lending and green mortgages now as perhaps there should be.
“The main incentive is an additional cashback which may not be enough to sway people to a green mortgage, especially when affordability is becoming very tight for most people.”
Mike Staton, director at Staton Mortgages says “green mortgages appeal to naïve clients who think they’re helping out the environment. Instead, they’re lining the pockets of high street banks”.
Based on a £300,000 property with a £45,000 deposit (85% LTV and five-year fix) as at 13 January, Staton tapped into an “intermediary special” which is only available to brokers.
The best green mortgage deal was 4.63% which came with a £995 fee. Once he’d taken ‘green’ out of the sourcing tool, a mutual offered 4.63% with a £999 fee – so just £4 more, without the requirement for an A or B EPC graded property.
The top fee-free deal came in at 4.79%. “Where is the incentive to get an A or B rated property from say a D, where for just £24 a month extra over the term of the five-year period you can get a fee-free deal?
“You will save £408 over five years if you go with the green deal but it could cost you £12,000 to get that property to A or B standard. To me, that’s a gimmick every day”, he says.
Lewis Shaw, owner and mortgage broker at Riverside Mortgages, says the difference between a green mortgage and a standard mortgage “is so minimal, it’s next to useless”.
He adds: “The cost of home upgrades will never match the minuscule savings a green mortgage offers you, and new builds are not always the greatest construction quality. So therefore, they’re essentially pointless.”
‘Long way to go for green mortgages’
Rhys Schofield, managing director at Peak Money, says he’d “love to see more lenders coming to the table with useful lump sums of cash for people to make their homes greener and bills more affordable”.
This is echoed by Craig Fish, founder and director at Lodestone Mortgages and Protection, who says he’s not sold one green mortgage to date “so much more needs to be done as an industry to improve knowledge of these products”.
He adds: “In principle, the idea behind it is a good one, and we all have a vested interest in protecting the environment, but the pricing differential between green and normal products is insignificant.
“For these products to become more popular, lenders need to be more creative and innovative, offering greater pricing differences along with other incentives such as zero or significantly reduced arrangement fees, and perhaps more importantly significantly improved affordability calculations.”
For Paul Elliott, managing director at Propp, “rewarding stock that is already efficient doesn’t address the major issue – the huge percentage of the UK housing stock that is not energy efficient”.
He says: “Some lenders have started to offer further advances specifically for energy efficiency improvements, but this needs to be adopted by the industry if we’re to meet the EPC challenge head-on.”
‘Green rates are often better’
By contrast, Austyn Johnson, founder at specialist broker Mortgages For Actors, says the rates or fees are often “slightly better”.
“I have recommended and carried out a few of these, but only really due to the rate being better for the client at the time”, Johnson says.
He adds that if a client is buying a property with an EPC of A-C, they can sometimes access EPC-friendly mortgage products, these often have lower rates, “not by a lot, but a little” and sometimes they have a lower fee or one of the fees has been dropped as was the case with Paragon which removed its £299 application fee in mid-2022.
However, he adds: “It’s not always the case though. Sometimes, the green deals are just outside of another lender’s better offering. Surely, if you are going to buy a good EPC property, you should be able to afford a bit more? There are so many things to consider and that’s why all mortgages should be tailored to the client’s needs as specifically as possible.”
When it comes to securing a mortgage deal, Emma Jones, managing director at Whenthebanksaysno, says you should look at the best value based on your circumstances.
“A green mortgage lender may not be offering the cheapest deal on the market. Let your mortgage adviser know your EPC rating and they can normally factor this in when they are searching the market for you rather than targeting only green products,” she says.
‘First step on a long path to providing mortgage finance’
According to the Green Finance Institute (GFI), there are more than 50 green mortgage products in the market but it is still relatively new but “scalable”.
Rachael Hunnisett, green mortgage campaign lead at the GFI, says: “Since the first green mortgage was launched to market, it has been fantastic to see more and more lenders each year introduce a green mortgage into their product range. This is a great step forward in product innovation, the first step on a long path of innovations that will forge the way to improving the energy efficiency of the UK’s homes.
“As the market, which is still relatively new, gets ready to scale, its important that we have products on the market which help us test, learn, grow and develop. I would like to see more product innovation over time as the market becomes more established and consumer demand grows.”
She adds: “It would be a real shame if risk of being hailed for ‘greenwashing’ were a barrier to entry to the market for lenders as I truly believe we need innovation and bold ideas to drive change, and often that starts small before it scales.”
According to the Mortgage Advice Bureau, 22% more lenders offered green mortgages in 2022 than in 2021, with Ben Thompson, deputy CEO at MAB saying “we can expect this to grow”.
He says: “Nevertheless, the industry has faced a challenging and turbulent economy, first with the pandemic and now the cost-of-living crisis. This has had a knock-on effect on the appeal and uptake of green mortgages. Given the rising interest rates that we have been hit with over the past year, cutting back costs and saving money is the main goal for many. Subsequently, consumers are opting for the most financially affordable mortgage scheme on the market.”
As such, Thompson says there’s a “supply and demand issue” which means “it’s not worth it” for lenders to work on differentiating their green mortgage products and offering better rates and incentives.
“As soon as we see an urgent need for them from consumers, whether through updates of regulations in the mortgage market or other government initiatives, we’ll start to see lenders differentiating their offerings in this space,” he says.
He adds: “Green mortgages are still a relatively new product, establishing their place in the mortgage market. Comments and criticism referring to green mortgages as ‘greenwashing’ is ultimately a natural reaction to a new product whose impacts on environment and successes haven’t had enough time to develop and become visible, especially when faced with a challenging and apprehensive audience.”