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Guiding clients through green mortgages

Jonathon Stinton
In this thought–provoking article, Jonathan Stinton, Head of Intermediaries explores what's on offer in the green mortgage market, why it's so important and how brokers can help to guide their clients.

Societies all over the world are facing an important question – how can they act to slow down climate change before it's too late?

This is also a question many individuals are asking themselves, and consumer behaviours are changing quickly and becoming more environmentally conscious in response, with EY data showing that 49% will prioritise the environment and climate change in how they live and the products they buy. Businesses in every sector are also beginning to take steps to reduce their carbon footprint and impact on the environment.

The big picture

Much of the momentum has been infused by governments, with administrations globally committing to net zero targets over the next couple of decades. The UK has made a pledge to be carbon neutral by 2050 and is already introducing initiatives to achieve this goal.

In 2017 the UK government released its Clean Growth Strategy (CGS), a document outlining its blueprint for a low–carbon future. Moving away from fossil fuels and improving public transport infrastructure are big picture changes which will undoubtedly make a difference, but there are smaller-scale steps which can be taken so everyone can play their part.

The CGS introduced the idea of 'green mortgages', which give borrowers preferential terms if they can demonstrate that their property meets certain environmental standards, while some other products offer incentives to borrowers who use their mortgage loan to make environmentally friendly home improvements.

The UK is continuing to play a key role in fighting climate change on a national level, demonstrated by its hosting of the COP26 conference in October and November this year. The mortgage industry is also stepping up to make its own impact, but a key driver for change has been consumer demand.

Calling for change

As with many of society's biggest evolutionary steps, the move towards a greener and more sustainable economy has in large part been led by consumer calls for change. More than just recycling and taking the bus rather than driving, shopping habits and big financial decisions are being increasingly impacted by green considerations.

Coventry's own research has revealed the steps consumers are already considering to improve their green credentials. Out of 2,000 UK homeowners, more than half said that rising energy prices led them to think about making their homes greener and more energy efficient. 80% are doing so to reduce their energy bills, which was the top motivation for making home improvements.

Not only this, but 40% also said they wanted to contribute to a more sustainable planet. A recent Deloitte study also found that 32% of consumers are highly engaged with adopting a more sustainable lifestyle.

Whilst this is a positive ambition, in reality it can be very expensive to make these home improvements, and many are priced out of taking steps like improving insulation, replacing windows, or installing better heating systems.

Answering the call

The mortgage industry has responded to this demand by creating green mortgages and other incentive–driven 'green' deals that not only reward those homeowners who have more energy–efficient homes, but also to help them pay for the necessary upgrades.

Since their introduction, green mortgages have become increasingly popular and are becoming a growing part of the mortgage sector. There are, however, lots of different products and policies out there. It'll therefore be vital for intermediaries to talk through the options available and help clients decide which product best suits their needs and their home, in addition to highlighting the benefits that each green product brings.

The types of green mortgages available often vary based on the energy performance certificate (EPC) of the property in question. Some products are reserved solely for those homes which have an EPC rating of C or above, and many homes with A and B ratings may be given a better mortgage rate.

However, not all green incentives exclude buyers with properties of a rating below C – typically, it is only green mortgage products which do this. Many lenders offer products which incentivise buyers to improve their homes' efficiency through the use of vouchers or cashback. For example, the Coventry Building Society's Green Together Reward offers customers £500 in return for carrying out work that aims to improve their property's energy efficiency, if their application for the scheme is successful.

There are other products on the market that offer alternative benefits, such as a higher loan–to–value for the most efficient homes and less restrictive affordability criteria. Some lenders will plant a tree for every mortgage sold.

Green mortgage experts

With the green revolution taking off, green initiatives becoming increasingly popular, and buyers needing practical advice on what green mortgages are and why should they get one, intermediaries have an opportunity to position themselves as green experts in the minds of their clients.

Intermediaries can make sure they are up to date with market developments by keeping in touch with lenders and finding out about their new green initiatives. Fostering good relationships with lenders will also help intermediaries when it comes to answering clients' questions and navigating the growing market.

Sharing product updates with borrowers and regularly communicating developments in the green mortgage market will show clients that they are knowledgeable in the green sector, meaning that borrowers are more likely to come to intermediaries for advice on all things green.

Intermediaries are in the best position to guide clients on this, educating them on the purpose of green mortgages, what products are on offer and the financial benefits involved. As sustainability continues to dominate business and political agendas, intermediaries will therefore need to become experts in what is soon to be a booming market.

The future of green

This booming market is likely to look different to the green mortgage landscape we see today. Not only are eco–friendly technologies developing rapidly, but so are the ways in which the industry is creating green products for borrowers. Importantly, though, we will probably see regulatory changes that shape the future of green mortgages.

That will most likely start with standardisation. The various different options described above are excellent in one way – they offer lots of different choice for different borrowers – but problematic in another, principally that there is no set standard that a green mortgage product has to be measured against or criteria it must meet. The government is already looking at putting regulations in place, so we might see big steps forward sooner rather than later.

Making green upgrades more affordable for older homes is another key development which we'd like to see. Most new–build properties are designed to be environmentally friendly, but it's harder to do for some older homes, and the skilled labour required to tackle older properties might not be there. This problem can be solved by making the technology itself cheaper, and by developing solutions which fit all kinds of home, from a 12th floor flat to a detached bungalow.

But for these things to happen, there is one overarching obstacle which must be overcome – awareness. While lots of people want to be 'greener', many don't really understand how they can do that through their mortgage. What's more, many brokers don't know enough about the different products on offer and how they can advise their clients when they ask about a green mortgage.

As an industry, there's a collective responsibility to make sure the green mortgage message is spread as far and wide as possible – it's only by working together that we'll be able to make real progress.

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