Sustainability and the mortgage market
Esther Dijkstra is a Society of Mortgage Professionals (SMP) board member and MD intermediaries at Lloyds Banking Group.
The recent COP26 showed commitment from leaders around the world to make a difference on climate change, but what does that mean for us in the UK mortgage market?
How does this translate to real, meaningful change in the way we build homes, buy homes, and lend to customers?
The UK’s house builders are already stepping up to the challenge. With the backstop of the Future Homes Standard coming in during 2025, they are starting to positively embrace sustainability opportunities: from testing new heating technologies to implementing environmentally beneficial features like swift and bat bricks. Amongst other things, the Future Homes Standard will require all new homes to be off the gas grid and meet more stringent energy efficiency standards, reducing emissions by 75-80%. This means new homes from 2025 should require no further retrofit to become ‘zero carbon’ as the energy grid continues to decarbonise.
It’s important to make energy efficiency a consideration for all homebuyers and mortgage products are already starting to reflect this. Brokers can recommend preferential mortgage products for homes with an EPC A/B rating, or products that reflect the reduced running cost in affordability calculations and allow borrowers to obtain a larger mortgage to support their purchase.
Whilst energy efficiency can literally be built into new homes, existing housing will need efficiency improvements and the refinance sector offers a real green lending opportunity. Buy-to-let landlords have a firm regulatory deadline to make their properties an EPC C rating by 2025 or face being unable to let them out. Some estimate that up to two thirds of rented property may need work to reach this level.
As part of a £450m three-year Boiler Upgrade Scheme, grants of £5,000 will be available from April 2022 to encourage homeowners to install low carbon heating systems at a price comparable to that of a traditional gas boiler. This scheme is part of a wider £3.9bn package to fund three years of investment, which includes the Social Housing Decarbonisation Fund, the Home Upgrade Grant scheme, and the Heat Networks Transformation Programme. All these schemes support a new target for all heating systems installed in UK homes to be using low carbon technologies by 2035.
This is only a small proportion of the innovation and change that we are seeing on green housing issues and keeping up to date with it all is not easy. This is where lenders, mortgage networks, mortgage clubs and broker firms can play a vital part in simplifying and communicating key messages to brokers and customers to help them make informed choices.
Networks and Mortgage Clubs add value by providing thought leadership, education, and support for their brokers. By monitoring the myriad of government green schemes, they can highlight those that could be beneficial to customers, educate brokers on green mortgage initiatives, and provide training on the sourcing tools that are preparing to include EPC ratings and other green criteria.
Recognising trigger points where customers are likely to act is key – moving to a new home, refinancing an existing property, or preparing their home to maximise its selling potential in a market that has a new outlook on sustainability.
The evolution of green mortgage products means this will need to be considered by brokers in the advice journey. How is energy efficiency data captured in the customer journey? For example, what is the property EPC rating, customer opinions on property improvement, or BTL landlords’ understanding of regulatory requirements? How is evidence of discussion and decision on green issues reflected in advice outputs?
The level of focus from COP26, government schemes, and mortgage products create a significant opportunity for brokers to encourage customer action through both the house purchase journey and home improvements. Are brokers able to address green issues as part of the advice journey or should brokers give guidance and information only? As green choices can affect mortgage decisions and funding, how can brokers identify the tools to help with their own education on this subject or for use in conversations with customers? How can brokers bring green issues to life for their customers?
Lenders face the huge task of improving the sustainability of their mortgage books, which will require a combination of retrofitting properties and growing the number of more efficient properties in their portfolio. Larger lenders are likely to have teams that can provide expertise and education on green issues. The availability and evolution of green mortgage products are likely to accelerate soon, and an increasing number of energy efficiency tools are becoming available such as the Halifax Energy Savings Tool, which is available on the Halifax website.
I have deliberately raised more questions than answers in this article as this is a great opportunity for debate. We all have a part to play in educating ourselves and our customers, and there is lots of scope for improvements in our processes to ensure sustainability becomes an everyday consideration within the housing market.