What is a green mortgage loan? The pros and cons

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If you’re thinking of buying an eco-friendly home or making your current home more energy efficient, a green mortgage could help you get cash back or a cheaper mortgage.

These home loans are intended to improve the attractiveness of properties that have features such as better home insulation – double glazing and caulking, for example – solar panels and modern central heating boilers that use less gas.

The resulting reduction in the use of energy powered by fossil fuels means reduced carbon emissions, which benefits the environment, while the borrower should benefit from lower energy bills as well as incentives offered by the lender.

However, the economy is particularly volatile and unpredictable at the moment – and as a result all lenders have raised their interest rates, including on green mortgages. In many cases, you may find that these deals are more expensive than the rates offered through standard mortgages elsewhere.

Still, it’s worth keeping an eye out for green mortgages if you’re considering making green upgrades to your home or buying an energy-efficient home. When the market eventually stabilizes and rates don’t move as dramatically, the pros can outweigh the cons.

In this article, we break it down:

What is a green mortgage and how environmentally friendly is it?

A green mortgage is a way for banks to reward those who buy energy-efficient homes or make upgrades to their existing homes that increase their energy efficiency.

However, it is important to note that a green mortgage is not green per se. They are usually provided by lenders who invest heavily in environmentally harmful industries, such as fossil fuel production, construction and agriculture.

See how you can use your money to benefit the environment.

What about banks and building societies?

Investing in environmentally friendly homes gives lenders a certain degree of future-proofing: lower energy costs for borrowers will provide some guarantees for their ability to continue to meet their mortgage payments; and homes on which lenders have advanced green loans may be more likely to retain their value as environmental awareness grows.

Which houses are eligible for a green mortgage?

An Energy Performance Certificate (EPC) measures the energy efficiency of your home. It assigns a letter between A (most efficient) and G (least). Newer homes tend to be much less energy intensive because they are built with more modern materials, while older homes tend to require more carbon-emitting energy to heat up.

EPCs are required whenever a house is built, bought or sold. If you are unsure of your home’s energy rating, you can check online using the Gov.uk database. If you are in Scotland, you can use the Scottish register.

If your home has an EPC rating of A or B, or if you buy one that does, some mortgage providers will offer you cash back or a lower interest rate.

What home improvements can I make to qualify for a green mortgage?

Some examples of home improvements you can make to increase your energy efficiency – and therefore gain green mortgage benefits – are double-glazed windows, solar panels or installing a more energy-efficient boiler.

How can I apply for a green mortgage?

Applying for a green home loan works the same way as any other home loan. Head to our mortgages page to know everything about this market including Is it a good time to remortgage? and Seven tips to help you get a mortgage.

What green mortgages are available?

Among a growing number of providers in this area, five major lenders offer green mortgage products or benefits.

Vendor What they offer
Barclays A lower mortgage rate for new builds with an EPC rating of A or B, purchased directly from a builder or developer, plus up to £2,000 in cash for existing customers who make green improvements to their home
At national scale Cash back of £500 or £250 on mortgages for properties with an EPC rating of A or B, respectively
NatWest A lower mortgage rate if you buy or remortgage a property with an EPC rating of A or B (the maximum you can borrow is 85% loan to value)
TSB A lower interest rate on extra money borrowed for energy-efficient home improvements, as long as you already have a BST mortgage
blank silver A lower mortgage rate if you buy a new property with an EPC rating of A or B (max 85% LTV), or a £250 discount if you already have a Virgin Money mortgage borrowing at least £2,500 to produce energy-efficient home improvements

A host of smaller lenders also offer similar benefits. Contact your mortgage lender to see if they have any green offers you might be eligible for.

Is a green mortgage worth it?

With the mortgage market in a state of extreme volatility, amid rising interest rates and inflation, home loans have become more expensive across the board – and this has affected green mortgages as well.

” The raise of [the number of] green mortgages are desirable and helpful, but it’s important that borrowers don’t just take a deal because it’s labeled green,” says David Hollingworth of broker London & Country Mortgages.

“They should shop around to make sure they’re getting the best rate in the overall market, and not assume that green deals will necessarily be the lowest rate on offer.”

Cheap mortgage deals are increasingly rare right now, but you can find them if you know where to look – check out our mortgage comparison tool to see what rates are available to you.

Currently, you can mainly find cheaper standard mortgage rates from other providers. For example, at the time of writing, Barclays’ cheapest two-year fixed rate green mortgage costs 5.75% (80% LTV, £0 fee).

Meanwhile, Coventry Building Society is offering a two-year fixed mortgage at 5.45% (60% LTV, £999 fee). This deal would save you almost £50 a month in repayments compared to Barclays’ green mortgage.

It should be noted, however, that Virgin Money offers relatively competitive green mortgage rates, with a two-year fixed rate green mortgage at 5.54% (65% LTV, £995 fee).

Although still more expensive than some of the cheaper mortgages, depending on your situation, this may be the best rate available if you qualify for a green mortgage.

Plus, since home loans are now much more expensive in general, any cash back you might get on a green mortgage can be offset by the savings you’d get on a cheaper standard mortgage.

Everyone’s circumstances are different, and a green mortgage in particular cases may be cheaper than others available. Speak to a mortgage broker to find out more about the rates available to you, and whether or not a green mortgage is likely to be the best option.

The benefits of green mortgages

  • You can save money on mortgages from several providers, such as Barclays, NatWest, TSB and Virgin Money.
  • You can get cash back to finance home renovations; Nationwide and Virgin Money are among the lenders that offer this.
  • Green mortgages can be a great incentive to make your home more energy efficient, saving you money on heating your home, while also benefiting the environment.
  • When mortgage markets are calmer, you are more likely to save money by going green.

The disadvantages of green mortgages

  • In most cases, you can find cheaper mortgage deals right now by searching the market or talking to a broker, instead of choosing a green mortgage.
  • Not everyone can qualify for green mortgages because you need an EPC rating of A or B for your home.
  • Mortgages themselves are not “green” – often they are provided by lenders who invest heavily in fossil fuels and other industries that harm the environment.

Will green mortgages be attractive again?

Maybe – it depends on what’s happening in the general mortgage market. The Bank of England is set to continue raising the base rate in an attempt to tackle rising inflation – from 3% now to an expected peak of 4.5-4.75% next year. This would lead to further mortgage rate hikes, also affecting green mortgage products.

The Bank has projected inflation to start falling in mid-2023, which theoretically means it can lower the base rate – offering the prospect that larger lenders may be able to offer more competitive rates on green mortgages, and they can become financially attractive.

If not, how can I use my money ethically?

There are several ways to ensure that your money has a more positive impact on the environment. First, Ecology Building Society offers a range of products – including savings accounts that invest your money in green projects, and specialist mortgages for ‘eco renovation’ or ‘eco new build’ projects.

Second, National Savings & Investments offers a green savings bond, which gives you 3% interest on your savings for three years. The money saved will be used to help fund environmentally focused projects, such as wind farms and public transportation initiatives.

If you’re looking to get even more out of your money, check out our Guide to ethical investingwhich can give you peace of mind that your money is being used for projects that match your views.

Ethical investing can also give you decent returns and help you beat today’s savings rates, which don’t come close to inflation – although, as with any investment, your money can lose value too. although winning.

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