WR Ethical Guide to Green Mortgages

What Is a Green Mortgage?

Green mortgages are an increasingly common offering from banks and building societies across the UK. As an ethical mortgage broker, we find this this encouraging, however many clients don’t yet fully understand what a green mortgage is, or the differences between them.

So with that in mind, we’ve produced this handy guide which will take you through topics including:

• What is a green mortgage?
• Look at how green mortgages work
• Explain who’s eligible for a green mortgage
• Consider the advantages for borrowers and lenders
• Addressing the question of whether green mortgages are here to stay

Background to Green Mortgages

The impact of our day-to-day activities on the planet are now well understood. We all recycle, demand manufacturers use less plastic and increasingly walk or cycle whenever possible. However, the impact of our financial decisions on the planet is a new idea for many of the people we talk to.

To understand this impact, we can begin by considering the old adage that ‘money makes the world go round’.

On the surface, finance may appear less important to the environment than sectors such as; energy, farming, transport etc. But in practice, if the financial sector were to prioritise the environment, everyone else would have to follow suit.

For example, if financial institutions choose not to fund a project to dig a new mine in a rainforest, the project won’t happen. Or if they don’t finance a new coal-fired power station, it won’t get built.

That’s why environmental campaigns such as Make My Money Matter focus their efforts on large banks and pension funds.

At an individual level, buying a house is probably the most expensive thing you will ever do. Over time, a lender will make a healthy profit on your mortgage repayments, and then invest those profits as their shareholders dictate. Given that you can choose your lender, wouldn’t it be great to insist that those profits are used for good?

We believe that when doing good is easy, almost everyone does it – just look at the explosion in; renewable energy tariffs, electric car purchases and those choosing mostly plant-based diets. With this in mind, we wanted to share our expertise, to help guide you through the world of green mortgages.

So, if you are curious about how your most important financial decision could impact the future of the planet, this guide will enable you to better understand your potential to drive positive change.

What is a green mortgage?

The natural place to start this guide is to address the question, what is a green mortgage? Green mortgages fall into one of three broad approaches:

Green Reward – a mortgage that offers a reward, typically cashback or a slightly lower interest rate, for owning an energy-efficient home. Quite a few (including us), would argue as to whether this truly counts as a green mortgage.

Green Lenders – a mortgage from a lender that uses money ‘for good’ by running their organisation in a way that seeks to prevent the climate crisis.

Green Home Improvements – a mortgage that is specifically designed to facilitate or motivate home energy efficiency improvements.

Current and planned legislation, as well as the prevailing national mood, has forced almost all lenders in the UK to consider their environmental impact. As a result, an increasing number of these lenders are now offering products labelled as ‘green’.

How do green mortgages work?

Green mortgages are structured like any other home loan. Borrowers must meet the lender’s credit and income requirements as well as provide the necessary financial documentation to qualify for the loan. The property against which the loan is being taken out must also meet certain criteria.

We’ll now take you through the details of how each of the three broad classes of green mortgage work.

Green reward mortgages – for these, the cashback or reduced interest rate will be applied when the mortgage is initially taken out. This will be based on supplying the lender with a valid Energy Performance Certificate (EPC) that demonstrates how ‘green’ the property is.

For some lenders this must be an ‘A’ rating, for most, it can be ‘A’ or ‘B’, while some will even accept ‘A, B, or C’.

This usually means that borrowers buying a new build, or recently completed property, get a slight discount over those buying older homes – it is rare for an older property to be able to achieve an EPC rating of ‘B’.

Green lenders – a mortgage from a green lender will work in much the same way as one from any other lender who might be considered less ‘green’. The key difference is that in choosing a lender who is truly green, you are taking a mortgage where the profits will be put to good use for the planet.

We work with Ethical Consumer, using their ratings (as an independent research organisation) to assess how green a lender is. On the mortgages section of their website, Ethical Consumer gives examples of good and bad practices amongst lenders.

Examples include major UK high street lenders investing billions each year in fossil fuel development versus those who are driven by ethical principles.

Trying to calculate an accurate figure on the size of Co2 emissions enabled by the value of your mortgage, and the investment decisions of a lender is not straightforward. It is clear however that how a lender invests its money has a huge environmental impact.

Green home improvements – lenders have two main ways that they will incentivise home improvements.

In some cases, a mortgage product is approved with incentives, such as a cash bonus (e.g. Kensington) or rate reduction (e.g. Ecology), if the homeowners do work that improves the energy efficiency of their property.

Alternatively, lenders may offer favourable rates for further advances with a portion (or all) of the advance to be used for energy efficiency improvements (e.g. Nationwide).

Mortgages such as these have an important role to play in reducing the nation’s CO₂ emissions. Data from the London Institute of Banking & Finance indicates that residential homes contribute approximately one fifth of the country’s overall emissions, with around 60% of homes having an EPC rating of D or below.

What is green about mortgages?

Unfortunately, many mortgages, including those labelled as green, aren’t green enough. Therefore the more appropriate question might in fact be, what can be green about mortgages?

Next, we dive into the numbers involved in the mortgage industry to give an insight into the potential for positive change.

Total UK mortgage lending – the outstanding balance of all of our mortgages added together – stood at approximately £1.7 trillion in 2022.

By way of comparison, this is approximately two-thirds of the size of the UK pension industry.

A recent report identified that if the pensions industry were a country, it would find itself in the top 20 carbon emitters globally.

Whilst there isn’t a direct link between the two industries, there are enough similarities to reveal how mortgage lenders have a significant environmental impact.

There are enormous amounts of money involved in mortgages, which could be used to drive a greener future. However, mortgage providers need to switch away from Green Reward mortgages, which are a little superficial, to truly becoming green lenders.

What’s in a green mortgage for the borrower?

This is an easy one, hopefully, evident from what we’ve already discussed. So, again, taking the three types of green mortgage in turn:

Green reward – as a borrower taking a green reward mortgage you may receive a cashback ranging from £250 – £500, or a 0.1% reduction in interest rate. As a reminder, this is paid to you for purchasing an energy-efficient (probably new) home.

There’s no incentive to do anything further and it likely is that the profits earned are funding activities which go against the green product you signed up for.

Green lender – the knowledge that you are doing what you can minimise the environmental impact of your mortgage.

Changes related to the property to improve energy efficiency remain your own responsibility. If enough borrowers take this approach, it would drive the whole industry to make fundamental changes, rather than superficial ones.

Green home improvement – lower costs, for finance and running your home, and the knowledge that you are making a difference where you can.

What is the benefit for the lender?

Green mortgage lenders benefit from the increased demand for their products. They will also benefit from the increased value of the home, as energy-efficiency improvements increase the home’s resale value.

Who is eligible for a green mortgage?

To be eligible for a green mortgage, borrowers must meet the lender’s credit and income requirements in general. Taking the three types of green mortgage in turn:

Green Reward: Your property must have an Energy Performance Certificate (EPC) with a certain rating (usually A or B, but sometimes just A, and sometimes C). For some, this must be at the point you take the mortgage out, whereas for others, the discount or cashback can be applied after you have made improvements.

Green Lender: Anyone who meets the lender’s requirements. As these lenders tend to look at their business holistically, in many cases they actually accept a broader range of customers than less green lenders. Examples of this include being more lenient on credit blips, and more generous with shared ownership affordability calculations.

Green home improvements: Typically, you will need to explain what you are planning on spending the money on, and prove that you have done the work. As an additional loan, you will still need to meet the general affordability criteria to ensure that you can pay it back.

Are there any negatives of green mortgages?

In short, it depends on what type of ‘green’ mortgage. The ‘greenest of green’ lenders is the Ecology Building Society, and their negatives could fall into two camps: property, and price.

Ecology do not lend on all types of property (they aren’t interested if your home is not eco-friendly), so are not suitable for many homes.

However, if you are looking to do an innovative self-build, convert a property to radically improve its energy efficiency, downsize to live in a houseboat, buy some woodland, or other eco-motivated decisions, they may well be your best option.

Ecology also tend to be relatively expensive compared to the high street. However, when compared to other niche lenders and smaller building societies, their rates are reasonably similar. You aren’t going to get any chart-topping rates, but when comparing like-for-like, the price is less of a negative than it first appears.

Beyond this specialist lender, neither price nor availability seems to be an issue between the greener or less green mortgage lenders.

In many cases, when we source the lowest cost mortgage deals available for a customer, then often those with a ‘green’ label, or those by one of the highly rated ethical mortgage lenders do come up cheapest overall.

For example, the high street lenders that offer cashback for properties with an EPC of A or B are usually very price competitive.

More encouragingly, one of either Nationwide, Coventry, Skipton, Accord, Leeds or Platform (all of whom score very highly with Ethical Consumer) is almost always in the top five cheapest available.

There are a couple of specific circumstances where you may be at a disadvantage for taking a green mortgage. The most common ones we come across are, if you are paid in Euros, or are not a UK or EU citizen, then you are usually left with a choice between a high street bank or a small building society.

Typically, the smaller building society may be classed as a green lender, but due to their size and flexibility, many of them have a slower application process and less competitive rates.

Finally, it is worth considering home improvement type mortgages and how practical it is to take on additional lending at a time when you might already be fully stretched financially. As a response, we are seeing more mortgages offered where the incentives are available at any point during the mortgage. This is great as it means lenders are helping borrowers decarbonise their home at the right time – rather than only being available at the point of taking out a mortgage.

Who is offering green mortgages?

Mortgages that could be classed as ‘green’ are offered by almost all of the standard mortgage providers in the UK housing market and many of the smaller ones too.

Below we look at the ‘top 10’ lenders by market share broken down across the type of green mortgage they offer.

Green reward mortgages – are offered by Natwest, HSBC, Santander, Virgin & Lloyds banking group (inc. Halifax, Scottish Widows & BM Solutions). This group accounts for nearly 70% of mortgages in the UK.

Green lenders – Coventry and Yorkshire (inc. Accord) Building Societies are rated a ‘best buy’ by Ethical consumers, recognising the many steps they take to minimise their environmental impact (and take other positive ethical stances). Nationwide, as a building society, also score reasonably well. TSB are aiming to be net zero by 2030, but currently are rated mid-table by Ethical Consumer.

Green home improvements – Nationwide & Santander offer green further advances at very competitive rates, making it easier for existing customers to finance green home improvements.

It is interesting to reflect on the ethical ratings of those lenders offering Green Reward mortgages. Bar Virgin, they all score very lowly, reflecting their investment in industries and practices that have contributed to the climate emergency.

However, a search for ‘Green Mortgages’ will bring them up as options – it is therefore easy to see why these options have been labelled as greenwashing.

How WR Ethical can help you to get a green mortgage

Here at WR Ethical we have a simple aim – to help you buy, and keep, a home you love in the most ethical way possible.

We run our business as sustainably as we can whilst helping you make informed choices through honest independent financial advice.

Given our gripe with the superficially green nature of many UK mortgages, we work doubly hard to avoid the charges of hypocrisy or greenwashing. As headlines, we:

• Ensure every customer has the chance to make an informed choice about where their money goes
• Share our approach, to inspire others, the goal is changing an industry, not growing an empire
• Set ourselves up in a way where we can give equal time and care to everyone – irrespective of how much money they are likely to make us
• Run our company in the ‘right’ way – from our recruitment approach to HR policies. To our approach to paying taxes and the suppliers we work with (office space being no.1, then IT equipment) – the works
• Give as much as we can to charity, and encourage others to do the same

We trust that you have found this guide interesting and that it has encouraged you to think about how green your mortgage may be.

In conclusion, the fact that most lenders are now offering a form of green mortgage is really encouraging, however, this remains a little superficial for most of the big lenders.

The good news is that the increasingly positive green sentiment evidenced amongst the UK population is capable of driving real change. This push for change is what is needed for mortgage lenders to take responsibility for how green their business truly is.

For individual borrowers, there’s now enough choice that means your next mortgage may help you save money whilst being good for the planet too.

If you’d like some help to find out more about getting a truly green mortgage then please get in touch.