Green Mortgages Explained

Green mortgages offer incentives, such as lower interest rates and cashback, to borrowers who purchase an energy-efficient home, or adapt their current home to meet certain environmental standards. Read on to learn how green mortgages work.

Joel Kempson Published on 17 November 2021. Last updated on 18 November 2021.
Green Mortgages Explained

Green mortgages reward homeowners with reduced interest rates for owning or buying energy-efficient properties. You could qualify for a green mortgage by renovating your home to make it more eco friendly or buying a home with a better eco rating. Your home will likely need an Energy Performance Certificate (EPC) rating of B or better in order to qualify for a green mortgage.

The greener your home, the less energy it uses. This means your utility bills will be lower, as your home wastes less of the energy it produces compared to the average property. In a 2018 climate report, the UK government stated that 15% of the UK’s climate emissions are produced by residential homes. Lowering this will reduce the national impact on the environment. Many financial institutions want to be seen to be making a positive impact on the climate, but green mortgages also make financial sense for lenders.

Green homes are more energy efficient, so cost less to run. That means homeowners are more likely to be able to afford repayments as their other monthly costs will be lower. Homes with a good EPC rating are also more valuable because prospective buyers will appreciate the energy savings that they offer. They are also considered to hold their value more effectively during times of economic uncertainty.

What is a green mortgage?

Green mortgages will usually be offered with lower interest rates than a standard mortgage from the same provider, but only applicants whose homes have a good eco rating can get one.

A green mortgage will function in the same way as a standard mortgage – you will be charged interest and you will need to make monthly repayments – but it should be cheaper than a standard mortgage from the same provider.

This saving may be made through a lower rate of interest, cashback, or both.

You should be able to access a green mortgage if you are buying a home with an EPC rating of B or above, or you are remortgaging a property where you have improved the EPC rating to B or better. This could be done through renovations, such as improved insulation or the addition of cleaner energy sources like solar panels. Eligibility criteria will vary, so check with your chosen provider to make sure your home qualifies.

While green mortgages are theoretically a great way to access a lower interest rate and get some cashback, it is still important to compare deals from across the market to find the best option for you.

A green mortgage will not necessarily be cheaper than a standard mortgage elsewhere. It is also important to remember that there is nothing specifically green about the mortgage itself. The positive environmental impact comes from your home using less energy, rather than anything to do with the funds to buy your home.

What is an Energy Performance Certificate (EPC) rating?

An EPC rating scores the energy efficiency of a property and can be used to estimate the energy consumption of a property. The certificate also details how a property’s rating can be improved. The rating lasts for 10 years and is given between A (the best) and G (the worst).

Is a green mortgage the same as an eco mortgage?

In some instances you may find that ‘green mortgage’ and ‘eco mortgage’ are used interchangeably to refer to the same set of products.

However, an eco mortgage can also refer to a mortgage for a home built using only sustainable materials and environmentally-friendly construction methods. These homes can be more challenging to borrow against than standard homes, so some lenders may offer specialist products and refer to them as eco mortgages.

» MORE: What to consider when buying a new-build home

How do green mortgages work?

A green mortgage functions as an incentive to improve the energy efficiency of your home, or to buy a home that is more energy efficient.

By making your home greener, or buying a green home, you should also be incentivising your lender to offer you preferential terms. That is mainly because your home will be cheaper to run than a less energy-efficient home, making your monthly repayments more affordable.

In this way, green mortgages make borrowing cheaper and lending more secure.

From an environmental perspective, green mortgages can reduce the UK’s level of domestic emissions by encouraging homeowners to make their homes more energy efficient. However, some providers will only offer green mortgages to those buying new-build homes. Therefore making your home greener may not necessarily help you access a lower rate when you remortgage, though you will make savings in other areas by having a greener home.

» MORE: Choosing ethical money solutions

Can green mortgages help me save money?

A green mortgage should have a lower interest rate than a standard mortgage from the same provider. However, you may find that you’re able to get a better interest rate on a standard mortgage from a different provider.

When it comes time to remortgage, you may find that it is cheaper in the short term to pay off as much of your debt as possible to access a lower loan-to-value (LTV) product than it is to renovate your home to access a green mortgage.

In the long term, making your home more energy efficient will save you money on utility bills.

» MORE: Ways to save energy at home

What are the pros and cons of green mortgages?

Pros

  • You may be able to access a lower interest rate
  • Your lender might pay you cashback

Cons

  • A green mortgage might not be the lowest cost mortgage available
  • Currently only a few providers offer green mortgages

It is also important to note that you don’t need a green mortgage to make your home greener. Making your home more energy efficient, or buying one with a better EPC rating, will mean your utility bills are cheaper.

How can I set up a green mortgage?

Finding a green mortgage will not be significantly different to finding a standard mortgage. Once you know if you are eligible for a provider’s green mortgage, you can apply for a mortgage in principle with that lender online, in branch or over the phone.

Alternatively, you can compare mortgages to find the best interest rate available, then explore whether your chosen provider offers a green mortgage.

Documents you need will vary from lender to lender, but you will generally have to provide proof of ID, such as a current passport or full UK driving licence photocard; proof of earnings, such as bank statements and payslips; evidence of your mortgage deposit; and utility or council tax bills as proof of address.

It is likely you would then need to prove your home’s energy efficiency by supplying a valid EPC with an A or B rating, or a predicted energy assessment if your home is yet to be built.

Sellers are required to provide an EPC when they market their property in England, Wales and Northern Ireland, and to have it on display in properties for sale in Scotland.

» COMPARE: Mortgage providers

Image source: Getty Images

About the author:

Joel Kempson is a personal finance expert and writer at NerdWallet. He has previously written for Money.co.uk and Uswitch, as well as being quoted in the Daily Express, The Mirror and The Sun. Read more

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