Energy prices have soared in recent years and the cost of electricity reached 12.8p per kilowatt-hour in December 2021, more than eight times higher than the same period in 2020.
In February 2022, the government announced that the energy price cap will increase by £693 in April. This means that £600 will be added to the average annual energy bill. The increase is driven by a record rise in global gas prices over the last 6 months.
Mortgage providers are concerned about the impact this will have on borrowers, especially when so many homeowners are already struggling to pay their energy bills.
In response to this, banks are looking for ways to offer loans to customers who may fail their traditional affordability tests based on the higher costs of living. For instance, Halifax is offering customers with energy-efficient homes access to larger loans through their ‘green test’ scheme.
Halifax’s green test
Halifax is launching a ‘green test’ that will give borrowers with green properties access to bigger mortgages. Higher loans will be provided on the basis that buyers of energy-efficient homes should have more disposable income because they will be spending less money on energy bills.
According to a spokesperson for Halifax, the test will review applications for new-build homes with an Energy Performance Certificate (EPC) rating of A or B for borrowers that “narrowly fail” a standard affordability assessment, using lower assumed fuel costs due to increased energy efficiency.
This means borrowers with green homes should qualify for bigger mortgages which will help them get on to the property ladder or move into a larger home.
EPC targets for mortgage providers
The UK government is coming under increasing pressure to meet environmental targets and decarbonise the existing housing market. Parliament is currently discussing plans to introduce EPC targets for mortgage providers. If these rules come into force, lenders will be required to increase the average EPC rating of their property portfolio to a C by 2030 or sooner.
Minimum EPC targets are not yet in force, but many providers are already offering green mortgages and other incentives to support sustainability and improve their lending portfolios. Halifax’s green test is an example of how lenders can help to create a greener and more affordable housing market.
What is an EPC rating?
An EPC provides a detailed assessment of a property’s energy performance. A certified assessor carries out an inspection and then gives the property an energy rating from A-G (A being the most efficient and G being the least).
The EPC report also provides homeowners with recommendations to improve their energy rating e.g. from a D to a C. Here are some common examples of energy-saving upgrades:
- Replace old appliances with new, energy-efficient models.
- Replacing an outdated boiler with a more sustainable heating system.
- Install solar panels or another renewable energy source.
- Add extra insulation to the roof and wall cavities.
- Upgrade old windows and doors.
A recent report revealed that the majority of homes in the UK fall into band D. Properties with lower energy ratings are more likely to be affected by energy price increases, which is why energy-efficient homes are becoming more attractive to buyers.
What do homeowners think of mortgages based on EPC ratings?
Data suggests that borrowers are in favour of higher mortgages based on EPC ratings. A recent survey found that 67% of all homeowners said a lower mortgage rate based on their property’s EPC rating would be an appealing element when looking at product features. Offering bigger mortgages and other incentives like lower mortgage rates on energy-efficient properties should incentivise buyers to choose green properties with higher EPC ratings.
Green incentives like Halifax’s green test may also encourage homeowners to carry out energy-saving upgrades to their properties in order to access bigger mortgages or products with green perks.
Energy prices have increased rapidly in recent years and they are expected to rise further following the new energy price cap increase in April. Mortgage providers are wary of lending to borrowers who may not be able to keep making loan repayments if the cost of living continues to rise.
Schemes like Halifax’s green test will help lenders assess how much borrows can afford and offer bigger loans to homeowners who choose energy-efficiency properties. Banks are also introducing a number of green incentives, e.g. green mortgages, to encourage buyers to favour energy-efficient homes.