How the mortgage market is crucial to the green industrial revolution
Kate Davies is executive director at IMLA
The government recently unveiled ambitious plans for a “green industrial revolution” that are part of the UK’s wider ambition for net-zero carbon emissions by the year 2050. While a great deal of attention has been placed on the drive towards electric vehicles and advancing renewable energy, with the UK’s homes currently accounting for 14% of the country’s carbon emissions, the housing and mortgage markets will also have a crucial role to play in meeting the net-zero target.
In its report – The Ten Point Plan for a Green Industrial Revolution – the government highlights two key ways in which the industry will be involved: helping to create more energy-efficient buildings, and offering green finance. The truth is that inefficient heating systems and a lack of proper insulation cause homeowners to spend far more than they need on energy bills. Tackling these issues will not only reduce the country’s reliance on fossil fuels but will also mean cheaper bills for consumers.
Incentivising consumers to make positive changes will be crucial here, however. A £1bn fund has already been created to make new and existing homes more efficient. The government has also extended the Green Homes Grant voucher scheme, which helps cover up to two-thirds of the cost of home energy efficiency improvements – such as loft and wall cavity insulation. The benefits for the wider economy could be significant, and the government estimates that 250,000 new jobs could be created by its plans.
However, these small steps are not a silver bullet. Many homeowners have already struggled to utilise the Green Homes Grant scheme, with the need to find a suitably accredited tradesman currently creating a significant barrier to entry. Tradesmen have in turn commented that the process of accreditation is unwieldy and not cost-effective – with the result that the scheme has not yet really taken flight effectively.
Alongside improvements to the way consumers use green schemes, there is also much work to be done around consumer awareness levels. IMLA’s Green Mortgage report (published in October 2020) found that 43% of consumers have never heard of a green mortgage. Despite some lenders making strides, the market is clearly still in its infancy.
However, our research found that this picture is shifting. It’s not only younger generations who have a much greater understanding of green mortgages and the benefits they can bring. IMLA uncovered that a growing number of consumers would even be willing to pay a premium for these loans. One in five (20%) consumers said they would pay an extra £100 a month for a green mortgage.
Challenges preventing adoption
While the COVID-19 crisis has primarily been a health emergency, it has also brought emissions and global warming into sharp focus once again. Pollution fell drastically during the global lockdown and the impact of lower emissions on air quality was – literally – clear to see.
Yet, despite the new potential for a larger green mortgage market and the government’s drive towards net-zero carbon emissions, challenges remain. For the housing market, the biggest barrier that needs to be overcome is consumers’ perception of what it will cost them. This is especially true at a time when many households are struggling because of the financial repercussions of the pandemic.
A common complaint is that improvements require substantial up-front payments, which can take years to recover through lower bills. More than a quarter (27%) of consumers say it would take too long for them to reap the benefits of green adaptations to their home.
The age of the UK’s housing stock also needs to be considered. Many homes in this country are more than 100 years old and often have little prospect of securing good Energy Performance Certificate (EPC) ratings. For instance, options like heat pump technology can help lower emissions in some properties, but will not be suitable in all circumstances. In this sense, there is more work to be done by Government and a greater emphasis will need to be placed on green energy production where energy efficiency cannot be remedied to meet modern-day requirements.
Despite these costs, the findings of IMLA’s report clearly highlighted that borrowers can at least expect to access green mortgages at competitive rates. The majority (77%) of lenders plan to launch green mortgages that are cheaper or priced the same as a typical product.
While the long-term impact of the Green Homes Grant has yet to be seen, its extension demonstrates the government’s commitment to improving the efficiency of residential homes. Ensuring that new-build homes are of the highest standard will be crucial if the government is to meet its targets, but the greater challenge will lie in improving the efficiency of existing housing stock, in a way which is affordable for homeowners and landlords.
Further support will be needed to raise awareness of green mortgages and technology, encouraging homeowners to take action and make positive changes to their properties. The good news is that mortgage lenders stand ready to support green initiatives. IMLA found close to a third (29%) of lenders have or plan to launch a green mortgage. More than a third (35%) of intermediaries also plan to advise clients on green mortgages in the future.
However, we must ensure that these green plans, led by government, are developed in conjunction with consumers, mortgage lenders and the building trade to ensure that any works can be carried out quickly, safely and at a reasonable price. There are sure to be some challenges ahead, but a coordinated response from Westminster and our industry could mean that any issues are tackled effectively.