Climate Change on the Doorstep

There are currently 27.2 million households in the UK and the UK Government is committed to build around 1.5 million new homes by 2022. The quality of these existing and new homes and how they are financed not only has a critical role in safeguarding people’s health and wellbeing, but in addressing climate change.

In 2019, the government published the Green Finance Strategy, which promoted the adoption of green finance products and services, and pledged to unlock green mortgages for new build homes.

Therefore, it is no surprise that Lenders have begun to create products that both incentivise and reward existing and prospective homeowners for adopting the green agenda.

Heating and hot water for UK homes make up 25% of total energy use and 15% of our greenhouse gas emissions. A further 4% of greenhouse gas emissions are the result of electricity used in the home for appliances and lighting. Although nearly all homes are naturally ventilated, cooling energy demand is increasing and projected to increase further with rising temperatures.

The challenge is clear in terms of improving housing, in England alone, 4.7 million dwellings (20%) failed to meet the Decent Home Standard in 2016, although this had fallen Neil Hoare Commercial Director

from 7.7 million homes in 2006. The private rented sector in England continues to have the highest proportion of poor quality housing, as defined by the Decent Homes standard, at 27%.

So where does the green revolution start and how does the financial services industry contribute to reducing the impact of climate change?

Obviously there is the task of improving existing stock, and then there is the challenge of improving new stock being brought to market. Building houses involves raw materials, people and machinery. So many of the big builders are examining using environmentally friendly building materials, locally sourced to reduce their carbon footprint. They now use electronic machinery rather than polluting diesel engines and many are now implementing electric heat source pumps rather than gas central heating boilers.

When it comes to mortgages, whilst there isn’t a universal definition of “green”, lenders offering green mortgages either offer borrowers preferential terms if they buy an energyefficient home, or if they commit to improving the efficiency of their current home. Eligibility criteria for a green mortgage varies from lender to lender, but the property’s Energy Performance Certificate (EPC) is typically a key factor and will need to be provided.

It is also thought that there are two potential avenues which could explain why a mortgage on an energy-efficient home might be less risky for a lender. Firstly, by making a property more energy efficient, the value of the property may increase, and also future-proof the property from costly mandatory eco-friendly property improvements. Secondly, a household with an energy efficient property will have, in theory, lower energy expenditures and therefore additional disposable income. This could provide a financial buffer for the household, reducing the likelihood of mortgage arrears. Green mortgages are still a relatively new innovation, and it may take several more years of observation and an increased availability of performance data on energy efficiency, loan performance and perceived customer value to understand if customers see their mortgage as a key driver of climate change.