In the vast majority of home purchases, finance is needed to cover the bulk of the cost. A variety of methods can be used to do so, from bridging finance to a traditional mortgage. However, a new form of finance has arisen in recent years – the green mortgage. Green mortgages have come to pass to encourage an environmental approach to homebuying, while still offering many of the same advantages of a traditional mortgage. Despite this, green mortgages remain under the radar, without much in the way of public knowledge.
In this article, we will shine a light on green mortgages, breaking down what they offer, how they work, and whether they hold up to a standard mortgage. Let’s get started.
What is a green mortgage?
A green mortgage is exactly as it sounds: a mortgage with environmental characteristics. Green mortgages aim to incentivise the purchase of environmentally friendly properties, such as those with an Energy Performance Certificate (EPC). An EPC can be issued to a property that is considered energy efficient. This requires an EPC rating of A or B, and considers factors such as double-glazing, insulation, solar panels, and so on.
A green mortgage can also apply to certain renovation projects. If you are considering making eco-friendly changes to your property, such as upgrades to your house’s heating system or the addition of solar panels, then you might qualify for a green mortgage.
Why were green mortgages implemented?
Green mortgages were implemented as a means to incentivise the purchase of eco-friendly homes, or the renovation of existing homes in line with environmental concerns. The idea is part of the U.K. government’s pursuit of net zero, an endeavour to reduce the U.K.’s carbon emissions output.
While perhaps a noble endeavour, green mortgages do have certain flaws when it comes to environmental concerns. Although it is certainly true that green mortgages fund eco-friendly projects, it doesn’t mean that the programme is beneficial to the environment at every step. Borrowers still need to repay, and lenders aren’t obligated to use the money to support eco-friendly pursuits. However, green mortgages are still just that – mortgages. While environmental factors are certainly part of the equation, it still needs to finance a borrower’s purchase or project. The question is, how exactly do green mortgages hold up?
How does a green mortgage work?
Green mortgages work much the same as any other mortgage. A borrower will submit an application, and the lender will judge it against certain criteria. The criteria under a green mortgage differ somewhat from traditional mortgages, as they require the borrower to make an eco-friendly purchase. This requirement is in place for two reasons: it promotes an environmentally conscious approach to homebuying, and potentially poses less risk for lenders. If borrowers purchase an energy-efficient home, less money will be spent on heating and lighting, which should reduce the likelihood that borrowers will fall behind on repayments.
Once a green mortgage has been approved, it will function the same as a traditional mortgage. The borrower will purchase a new home or fund a renovation project, and monthly repayments will begin. These repayments are often cheaper than traditional mortgages, as lower interest rates or cashback options act as a further incentive to apply for a green mortgage.
Should I apply for a green mortgage?
Although there is a clear difference between green mortgages and traditional mortgages, the two forms of finance are still quite similar. As such, it may not be clear at first glance whether a green mortgage is a good idea over another option. This being said, green mortgages sport a series of advantages over other options, with environmental factors being only one. It is important to consider these advantages before taking action.
Also Read: Bridging Loan Criteria: Who Can Take Out a Bridging Loan?
Advantages of a green mortgage
Green mortgages offer borrowers a range of benefits. Naturally, the biggest draw is a positive environmental impact through energy efficiency, but there are several other advantages to consider. These advantages include the following:
- A cheaper option – Arguably the most important advantage to a green mortgage, second only to environmental impact, is affordability. Green mortgage lenders typically offer these loans at lower interest rates compared to other options. This means cheaper interest payments and a smaller debt to repay overall. In practice, this makes green mortgages the cheaper option compared to traditional mortgages.
- Long-term financial impact – By taking out a green mortgage for an eco-friendly house purchase or renovation, you’ll end up saving money in the long term. This is due to two factors: the aforementioned lower cost, and the savings you’ll make thanks to energy efficiency. By purchasing an eco-friendly property, or refurbishing one to have more eco-friendly traits, you’ll end up saving on your heating bill and possibly your electric bill.
- Build property value – Making eco-friendly additions to a property is a great way to add value. Solar panels, insulation, double glazing, and an efficient heating system are all prime qualities in a property, ones that are sure to add extra value to your home. Obtaining a green mortgage can make these additions a bit cheaper, making it a win-win for renovators. Additionally, the demand for eco-friendly homes is steadily rising, which will translate into a higher value down the line.
Wrapping up
Green mortgages are a perfectly viable method of financing the purchase of a home, or the eco-friendly renovation of an existing one. They function much the same as any other mortgage, allowing borrowers to cover the large shortfall on the purchase of property. In fact, they tend to fill this role quite well, being less expensive compared to other options due to lower interest rates and cashback options. In the financial regard, green mortgages can certainly do the job.
However, exactly how “green” they are is up for debate. Though they specifically aim to incentivise environmental consciousness in homebuying, the long-term effectiveness remains to be seen. As such, you might not want to pin your decision on this environmental factor, given the money and time involved in such loans. As always, it is good practice to consult a financial advisor for professional insight before taking action.