What is meant by green mortgages and what is the FCA’s view?

  • Explain how brokers can help clients gain a better understanding of green finance
  • Identify risks around green mortgages
  • Explain the impact of consumer duty
What is meant by green mortgages and what is the FCA’s view?
The FCA has highlighted the importance of green mortgages in helping decarbonise the UK’s housing stock (Photo: Jason Alden/Bloomberg)

Very rarely do you see new innovative products in the mortgage market. Many households will recognise hearing about fixed terms, trackers, discounted rates and offsets, but only recently has the term “green mortgage” started making headlines.

A green mortgage can also be referred to as an eco-mortgage or green mortgage loan. It is suitable for properties that have an energy performance certificate of C or above. 

An EPC is a way in which the energy efficiency of a home is measured as a monetary value. An EPC report will provide the typical energy usages and costs of the property, as well as some recommendations on how energy expenditure can be reduced in order to save money.

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EPCs were introduced in England and Wales on August 1 2007 as part of home information packs for domestic properties with four or more bedrooms. When the requirement for HIPs was removed in May 2010, the requirement for EPCs continued.

The certificates are ratings that range between A and G and are valid for 10 years, with A being the most efficient rating.

EPCs are required whenever a property is built, sold, or rented. A homeowner must arrange an EPC for potential buyers and tenants before they are allowed to market their property.

The UK has some of the oldest building stock in Europe; 36 per cent of UK homes were built before 1945 and at least 75 per cent are predicted to still be in use in 2050.

The Financial Conduct Authority has recently highlighted the importance of green mortgages in helping decarbonise the UK’s housing stock. Residential homes account for one-fifth of the UK’s greenhouse gas emissions and, by making homeowners aware and providing incentives, sustainable retrofittings on homes through green mortgages become a valuable means of reducing UK emissions through collective effort. 

FCA director of retail banking David Geale recently mentioned the significance of the mortgage market’s role in reducing UK emissions: “Lenders risk missing their decarbonisation targets if they don’t evolve their support for homeowners to enhance energy efficiency.”

Adopting this attitude throughout the market could lead to an increase in green mortgage products and innovation.

How do green mortgages differ from normal mortgages?

Green mortgages work in the same way as other types of mortgages but are specifically designed for properties that are energy efficient or have renewable energy sources. 

If a home meets a certain EPC rating — typically C or above — a buyer will be eligible for green mortgage products that typically have a discounted rate and/or cashback.

Non-green products are typically market-leading products, meaning taking on a green mortgage does not necessarily result in the borrower getting the best rate.

For example, at the time of writing (April 26), HSBC has a five-year fixed priced mortgage at 3.76 per cent, compared with the Virgin five-year green product at 3.81 per cent.

Nationwide currently offers £500 cashback on its mortgages on properties with an EPC rating of A, or £250 if it is B rated.