Energy efficiency mortgages
Could better analysis of home energy costs give home buyers access to bigger mortgages for low energy properties, and encourage those selling homes to make energy efficiency improvements?
Report from – Tom Harvey
An estimator tool has been developed to predict householder fuel bills, and to show how they are likely to be affected by the energy performance of the home – which is indicated by the home’s Energy Performance Certificate (EPC). This Fuel Bill Cost Prediction Tool is available at www.epcmortgage.org.uk
It was developed as part of the LENDERS project, which set out to demonstrate that better analysis of likely household energy costs could improve mortgage affordability assessments. Households with lower fuel bills have more uncommitted household income, so better forecasting of fuel costs could allow home buyers to access bigger mortgages for low energy properties without paying more overall.
“Our research indicates that low energy homes potentially enable homebuyers to borrow more than those buying poor performing homes,” says Andrew Sutton, Associate Director at BRE, which was part consortium of industry experts that conducted the LENDERS project. “Put simply, energy efficiency brings smaller energy bills, which if captured when calculating mortgage affordability could allow buyers to take out a larger loan.”
Currently, the process of calculating how much a homebuyer can afford to repay each month for their mortgage takes no account the energy performance of the home being mortgaged. Adjusting the method to reflect likely fuel costs predicted by the new estimator tool, if adopted by the mortgage industry, could transform the housing and energy efficiency markets by making energy performance a fundamental part of mortgage lending.
Over time, this could lead to a much closer relationship between properties’ energy efficiency and their value, encouraging buyers towards homes with lower energy bills, and increasing their willingness to invest in improving energy efficiency.
“The LENDERS project has developed a valuable tool that could help customers forecast their future home’s energy costs,” says Henry Jordan, Director of Mortgages at Nationwide Building Society. “The work highlights the impact of home efficiency on fuel costs and presents a potential opportunity for lenders to support customer’s home and environmental ambitions and to improve the UKs energy performance.”
The project included the analysis of 40,000 sets of property data - compared to the current information on fuel costs data which comes from around 4,900 homes and is taken from the Office of National Statistics “Family Spending Report”. This comparatively large data sets, has enabled the project to map the relationship between property energy performance and household fuel bills.
The LENDERS project’s final report was launched by the Minister for Industry & Climate Change at Westminster Central Hall in July 2017. It showed that the range of fuel costs between EPC ‘A’ rated properties and ‘G’ rated properties, if factored into an affordability calculation, could vary the maximum mortgage amount that could be borrowed by £11,500 - where all other lending factors are the same. This means that the same household could borrow £11,500 more against an ‘A’ rated property than against a ‘G’ rated one. In many cases finding houses at both extremes of the EPC range won’t occur. The variation in maximum mortgage offer for two EPC bands (such as ‘E’ to ‘C’) would be likely to be in the region of £4,000.
The project hopes that the possibility of more money for home buyers that choose lower energy homes, will shift buying habits towards such homes. In turn, lower energy homes could see faster sales turnarounds, encouraging those renovating or selling homes to consider improving energy performance - with the potential for additional borrowing against such energy performance work providing them with access to funds.
“This government is committed to making home ownership affordable for all,” says Claire Perry, MP, Minister for Climate Change and Industry. “More accurate estimates of household energy costs could improve lending practices, lead to new sources of finance and increase energy efficiency across the country. That’s why government funded this project through Innovate UK and looks forward to seeing the industry take action in response.”
The project has been praised by the Government’s Department for Business, Energy & Industrial Strategy (BEIS) which is now looking at how this and related energy efficiency drivers can be adopted by the UK mortgage sector.
Changing the underlying mortgage affordability calculation that underpins at least £127bn of lending in the UK each year is not likely happen overnight. But the first step is to make the forecasting tool available to homebuyers as informal guidance initially, which the project has done through its website. Lenders are beong encouraged to follow suit, with more detailed assessment of how to adapt affordability calculation likely to come in the following few years.
The consortium of partners that undertook the protect comprised Arup, BRE, Constructing Excellence Wales, the Energy Saving Trust, Nationwide Building Society, Principality Building Society, UCL Energy Institute and the UK Green Building Council.
For more details and to download the report visit www.epcmortgage.org.uk/report