Green mortgages should focus on existing homes, not just new builds – analysis

Green mortgage offers should focus primarily on the existing housing stock, as current options do not solve the problem, but move them to someone else.

Talk with Mortgage solutionsCraig McKinlay, new business manager at Kensington Mortgages, said he was not a fan of mortgages that offered reduced rates or cashback on already successful properties because they were “taking the easy route”.

Kensington Mortgages is offering a product aimed at new homes with an energy performance certificate (EPC) between A and C, as McKinlay said it would be “unfair” not to. However, But said he preferred the lender’s other offer which rewards borrowers with £1,000 if they improve their home’s energy efficiency rating over the term of the fixed rate.

This was launched in 2020 as part of the lender’s response to climate change conversations in the wake of Australia’s bushfires.

“The reason I really care about it is because the client only gets money if they do something that improves the climate footprint of their property, which seems like something we should do,” McKinlay added.

His concern with mortgages that reward efficient new home owners is that the borrower has done nothing to make the home more sustainable.

McKinlay said it was also relevant in cases where landlords are selling lower-rated homes to avoid penalties from proposed legislation to buy more efficient properties.

“The problem with that is that you haven’t solved the problem; you moved the problem.

“All the emissions come from the second-hand housing stock. This is where the challenge lies. And that’s what I think lenders, government and rating agencies should focus on.

Not enough incentives

Danny Belton, head of lender relations and the Legal and General Mortgage Club, said the green agenda had been a topic for years and the company was aware the UK was aiming for its economy to become market neutral. 2050.

As for the targets imposed on the real estate market, he said: “There is no full confirmation yet, and that is what we expect as an industry.”

Belton also said that for the most part the existing mortgage options were “not designed to deliver an outcome in terms of improving the existing housing stock in the UK market”.

He said even in the new-build market, where most efficient homes were being built, few had an A rating. Belton said that was because profit margins were tighter on A-rated homes. .

Belton added: “So you could argue that the incentive isn’t quite there for a builder to build too many A-rated properties.”

He said there were some options that encouraged and rewarded people to improve the energy efficiency of their homes, but that still didn’t add up to a “large” amount of products on the market.

Belton also said homeowners weren’t quite at the thinking stage of improving the energy efficiency of their homes because there was little immediacy about savings or targets.

He added: “Once we get rules certified, once we have a better understanding of what we are really trying to achieve and what mechanisms are available, lenders can deliver products, brokers can talk to their more informed customers. And customers will be able to make better choices.

New energy efficiency measures?

Belton also said that in addition to a lack of confirmation on timelines, there was always the possibility that the standards used to measure effectiveness could change.

There have been debates surrounding the effectiveness of an EPC rating when judging a property’s environmental footprint. He said the emissions produced by a property could be a more accurate guide.

As an example, Belton noted that two identical properties can have the same EPC rating, but one could have a lower carbon footprint depending on the tenant’s energy usage.

Belton said energy use could be factored into mortgage affordability tests instead of boosting borrowing.

McKinlay said the same, adding that one area he wanted to look at was factoring energy bills into affordability so those paying less could access more from a lender.

“I don’t think anyone does it yet. But it seems like a sensible place to look,” he said.

McKinlay said while having inefficient homes on a lender’s backlog was a “credit problem,” a scenario where lenders are punished for lending to people with lower ratings should be avoided. .

He added: “The focus needs to be on improving the current stock because that’s where the problem lies.”

Declaration rules

In addition to a disjointed approach to improving energy efficiency, a consultation was opened by the International Accounting Standards Board (IASB) last September, where it sought views on classification and measurement rules in IFRS 9, which assess the credit risks attached to the assets.

Some respondents asked whether the IFRS 9 presentation rules require loans with ESG-related features to be measured at fair value through profit or loss or at amortized cost less impairment. This was considered important because fair value accounting is generally associated with greater volatility in net income.

The IASB is currently considering a standard on accounting for these assets.

Graeme McRitchie, head of prudential risk at the Leeds Building Society, said he did not see lower-rated homes as a limiting factor from an IFRS 9 perspective at the moment because there was no insufficient evidence of this impact on current house prices.

“However, this is being watched closely and may become a more relevant factor over the next few years once the new EPC regulations are finalized and begin to influence the housing market and therefore market valuations, or if the impacts of the cost of – the crisis of life is further intensifying,” he added.

The role of the mortgage industry in sustainable housing

Essentially, it was up to lenders to create products to encourage the use of sustainable housing, but last week the government announced another fund to help develop options.

When asked if it was right for lenders and mortgage advisers to be responsible for improving the UK housing stock quality, Belton said, given that residential properties account for 20% of the country’s emissions, the sector had “a role to play.”

He said: “By default, as an industry, we have to be seen as doing something and trying to do the right thing and help customers.”

However, he said the sector needed to know its place, adding: “We need to make sure we don’t become an industry of people renovating homes. But we should help customers understand the importance of the diary.

McKinlay said there were many communities, not just single-family homes, but areas where inefficient properties were a problem.

“And that doesn’t seem fair when the government is supposed to be stepping up a gear,” he added.

Mortgage Industry Takes Greener Steps

In addition to helping landlords make their properties greener, Belton said the sector could become more environmentally friendly in its processes and operations.

He added: “We have to make sure we watch each other. We have to make sure we watch our businesses and how we conduct ourselves.

“We can make small changes now that collectively will make a big difference over time. And I know that many companies and brokerages have already started to change the way they operate and the type of cars they drive.

“Lenders are definitely looking at their own business to try to do things like programs to offset their carbon emissions, which is great. We can always do more, but we are making the right decision.

“We are starting to see some brokerages doing the same. But we all have to do things and all of us do that little thing in our daily lives, it really makes a difference,” Belton said.

Shekina is the business writer for Mortgage Solutions. She has over four years of experience in the B2B publishing market, with previous industries including accounting, pets, funerals, hospitality, retail and jewelry. She currently reports mortgage market news and liaises with financial clients to produce sponsored content. Follow her on Twitter at @ShekinaMS

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