When you are buying a home, as well as looking for high energy efficiency and for features such as double or triple glazing, loft insulation and a highly efficient boiler, you can strengthen your eco credentials by applying for a green mortgage.
These used to be a niche product, but lenders are now offering deals to home buyers who purchase environmentally sustainable homes.
Green mortgages are also likely to become more popular in the future as the Department for Business, Energy & Industrial Strategy (BEIS) has been consulting on setting requirements for lenders to help householders improve the energy efficiency of their homes, with the results being published later this year.
The government wants lenders to disclose energy performance data annually to monitor how the energy performance of homes is influencing lending decisions.
What is a green mortgage?
To help reduce climate change, some banks and building societies are rewarding customers who buy energy-efficient homes by offering a discounted two-year or five-year fixed-rate mortgage and cashback offers.
Green mortgages aim to offer borrowers preferential terms to buy a property so long as it meets environmental standards. New-build homes that have a high energy efficiency rating – such as many of the houses, bungalows and apartments featured on ihometrade.com – will often qualify, as well as properties that have been renovated to improve their environmental standards.
Lenders will generally expect the property you are buying to have an energy efficiency rating of A or B on its energy performance certificate (EPC) to be eligible for these green mortgage deals. You can find out more about EPCs here.
There were 26 green mortgages available at the end of April, according to research by independent financial information expert Defaqto, from household names including Barclays, Nationwide, NatWest, and RBS.
Green deals can range from lower interest rates for buying an energy-efficient property or fund home improvements to cashbacks offers, or both.
For example, you could apply for a Barclays Green Home Mortgage if you’re buying a new-build property directly from the builder or developer. If the home you want to buy is in energy efficiency bands A or B, with an energy efficiency rating of 81 or above, you could get a lower interest rate on some fixed-term mortgages
How do the rates compare?
Defaqto’s research shows that while standard mortgages are generally slightly cheaper, green mortgages beat the best standard mortgage on the market on some two-year fixes.
At the time of writing, the best green mortgage deal was from NatWest, offering 1.13% interest for a two-year fixed rate with a loan to value (LTV) of 60%, plus fees of £995 and a cashback incentive of £250.
In comparison, the best non-green mortgage two-year fix from First Direct with a 60% LTV has an interest rate of 1.24% and a fee of £490.
Nat West is also offering two-year fixes with 75% and 85% LTV at an interest rate of 1.38% and 2.49% respectively – again with £995 fee and £250 cashback.
This compares with an interest rate of 1.31% for Halifax’s two-year standard fix with a 75% LTV, with fee of £995, and Newcastle Building Society’s 2.65% for an 85% LTV on a two-year fix, without any fees.
Meanwhile, Barclays has a green deal with a 90% LTV with an interest rate of 3.62%, with no fees or cashback. In comparison, a standard, non-green mortgage from HSBC with 90% LTV has an interest rate of 3.29%, also with no fees to pay.
When it comes to five-year fixes, NatWest’s green mortgage offers an interest rate of 1.28% for a five-year fix with 60% LTV, with £995 fees and £250 cashback. In contrast, Santander offers the same LTV with an interest rate of 1.27%, with £999 fees and £250 cashback.
Some banks and buildings societies are offering cashback incentives for new and existing properties, with an EPC rating of A or B.
For instance, NatWest and Santander are offering £250 cashback, while Nationwide will reward you with £500 cashback for a property with a score of 92 or above or £250 if it scores 86 to 91. This is available on top of Nationwide’s other cashback offers.
Meanwhile, Foundation Home Loans, which offers green deals to re-mortgage, is offering borrowers £750 cashback but is not in Defaqto’s best buys as its interest rates are higher.
Lenders will usually pay the cashback to your solicitor on the day you draw down your mortgage.
“It can cost a lot to make a property more environmentally sustainable and it is great to see some benefits for those who buy them,” says Katie Brain, banking expert at Defaqto. “Most new homes will be eligible for these deals, but older properties that have been renovated to achieve a high energy efficiency may also fit the criteria.
She adds: “Anyone buying a property with an energy efficiency rating of A or B would be wise to consider all their borrowing options to get the right product for them. They should look at all the features, such as the interest rate and introductory deal period, as well as any upfront incentives, to make sure they get the right product for them. An independent financial adviser can help with this.”
Interest rates are subject to change, so check rates with the lender before applying.