Green Mortgages: What Are They and How Do They Work?

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. This means you can save money while doing your bit for the environment.

Joel Kempson, Tim Leonard Last updated on 18 March 2022.
Green Mortgages: What Are They and How Do They Work?

Having a green mortgage can give you a little extra satisfaction in more ways than one. Firstly, it can be good for your finances. Green mortgages reward homeowners with reduced interest rates and cashback for owning or buying energy-efficient properties. And the greener your home, the less energy it uses, meaning your utility bills are likely to be lower too.

Secondly, having a property that qualifies for a green mortgage means you’re doing your bit for the environment. The latest government data published in 2022 revealed that around 16% of the UK’s climate emissions are produced by residential homes. Lowering this will reduce the national impact on the environment, and contribute, in some part at least, towards the effort to safeguard the future of our planet.

What are green mortgages?

A green mortgage is a way of raising finance to buy a property that meets certain energy efficiency standards and so is considered to be environmentally friendly. Importantly green mortgages will usually be offered with lower interest rates than a standard mortgage from the same provider, but only if the home is eligible through having a good enough eco rating.

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. However, your home will likely need an Energy Performance Certificate (EPC) rating of B or better in order to qualify for a green mortgage.

What does an energy performance certificate show?

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

EPC ratings can usually be found at Gov.uk for properties in England, Wales and Northern Ireland. There is a separate register for properties in Scotland.

How do green mortgages work?

A green mortgage will work 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.

However, a green mortgage will not necessarily be cheaper than a standard mortgage with a different provider. 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.

Is an eco mortgage the same as a green 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

Qualifying for a green mortgage

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 achieved 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.

As with any other type of mortgage, you’ll also need to prove that the green mortgage you want is affordable. Lenders will therefore want to check your credit score and evaluate your wider financial situation in respect of your income, outgoings, debt, and so on.

» MORE: Knowing if you’re eligible for a mortgage

Why should I get a green mortgage?

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 can make borrowing cheaper and lending more secure. 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.

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?

The benefits of a green mortgage are perhaps more easily seen than the potential drawbacks, but it’s important to consider both.

Advantages of a green mortgage

  • You know your property is helping to reduce your carbon footprint.
  • You may qualify for a lower interest rate or cashback.
  • A home that qualifies for a green mortgage might hold its value better than others.

Potential drawbacks of green mortgages

  • There may be non-green mortgages available with different lenders offering lower rates.
  • The number of green mortgages available is relatively limited right now.
  • Renovations and improvements required to make your home eligible for a green mortgage might be expensive.

How do I apply for 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 photocard driving licence; proof of earnings, such as bank statements and payslips; evidence of your mortgage deposit; and utility or council tax bills as proof of address.

You should also expect to be asked 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 rates

Image source: Getty Images

About the authors:

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

Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more

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