BoE: Mortgages against energy-efficient homes less likely to fall into arrears

Jessica Nangle

February 3, 2020

An analysis by the Bank of England has suggested that mortgages against energy-efficient properties are less frequently in payment arrears.

In a Staff Working Paper written by Benjamin Guin and Perttu Korhonen, a conclusion is made that energy efficiency is a “relevant predictor” of mortgage defaults.

The research used a data set based on the performance of 1.8 million mortgages in the UK at the end of 2017.

It estimated that around 0.93% of residential mortgages against energy-efficient properties are in payment arrears, which is 0.21 percentage points lower than their energy-inefficient counterparts.

This figure compared to 1% of medium energy efficient properties and 1.14% of low energy efficient properties.

In terms of the total share of mortgages in arrears, there were 7% fewer high energy efficient property borrowers falling behind in payments compared to those in medium energy efficient homes.

The report states: “Two mechanisms could be driving this difference.

“On the one hand, energy bills are lower for energy-efficient properties.

“Savings on energy bills could lead to lower arrears rates (“energy savings effect”).

“Alternatively, high-income borrowers could be more likely to take out mortgages against energy-efficient properties.”

The research highlights that around 23% of all properties are of high energy efficiency, which is the equivalent of an EPC rating of A, B or C.

Meanwhile almost half (49%) are of medium energy efficiency which is an EPC rating of D, whilst 29% are of low energy efficiency with ratings of D, E and F.

The average age of a borrower at the time of a mortgage application was 37, the average income was £55,000 and the average LTV was 81% according to the report.

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