Peter Barnes is head of Mortgages for Business Intermediaries
Greta Thunberg has torn into Joe Biden’s green agenda recently, saying it was strange for Biden to be considered a leader in climate change, considering his administration’s stance on the use of fossil fuels.
The US leader pledged to crack down on new gas and oil leases as part of his electoral manifesto – but he has yet to follow through on his pledge.
It’s lucky Thunberg is keeping Biden honest. In the mortgage industry, it’s the borrowers who are holding us to account. Lenders and brokers who want to grow have to adapt to their demands and our research suggests three in every five landlords are interested in green mortgages.
When we polled our borrower clients, 62% of landlords described themselves as interested in mortgages that reward borrowers with discounted rates for making their properties more energy-efficient and shrinking their carbon footprint.
They are the Greta Thunbergs of the mortgage world, and they are driving a new wave of green mortgage innovation.
But this statistic also marks a huge change in the priorities of borrowers. When we polled them, not a single landlord who had purchased their first buy-to-let (BTL) property before 2000 said they had been interested in green mortgages at the time.
Only 10% of the landlords who had acquired their first BTL property in the noughties said they had been interested in green mortgages when they made the purchase.
Given that housing accounts for such a significant chunk of the UK’s carbon emissions, it’s great that landlords have seen the light and are driving the green choice agenda.
I suppose the powers that be deserve some credit, too – landlords know they have to upgrade their properties to meet new EPC rating rules.
So the demand is, finally, there. Of course, it should be. Quite apart from the ethical considerations, green mortgages reward landlords whose properties meet the higher energy efficiency standards.
Is mortgage supply ready to meet demand? There are various green mortgage products out there, but many reward the housing stock that is already meeting the higher energy efficiency rating.
But how do the landlords raise the money required to improve their existing properties to meet the required ratings of C or above? If the property is already leveraged at 75% or 80% loan to value, there’s no scope to refinance unless a lender can consider the future value that improving the EPC may attribute.
This is not currently possible within the specialist BTL mortgage lenders, due to how they are funded. Bridging may be an option, but not an ideal one given the short-term nature of the loan.
Then there’s the issue of any additional borrowing having to meet the stress tests applied to capital raise. Again, lenders have little or no scope to go against Prudential Regulation Authority (PRA) guidelines to navigate around this issue, even if the improvement made merit an increase in rent in the future.
Finally, actually doing the work required may mean the property is untenantable while the work is carried out, affecting the tenant, the landlord’s income, and potentially how other lenders may view the refinance of property in that landlord’s portfolio in the future.
A solution to the problem isn’t easy to see, and the targets set by the government lack any cohesive plan. More thought – and some real innovation – is required.
Balance sheet lenders may be able to adapt quicker and possibly apply reductions to rates on completion of an energy efficiency project.
A green mortgage could mean that, once they can confirm they have a revised energy rating for their property, the right lender will remortgage on to a more attractive green rate.
That is a critical distinction, because much of the UK’s housing stock is very energy inefficient, making our homes a major source of greenhouse gas emissions.
Improving the energy efficiency of the UK’s stock of housing is a priority in the fight against climate change. In September, we learned the UK is lagging behind most European countries in using low-carbon heat pumps to reduce home emissions. Something needs to change.