Article originally published in The Intermediary Jan 2025 – page 7

2024 was an important year for green finance – we saw the Financial Conduct Authority publish its long-awaited rules on greenwashing come into force on 31 May and while its remit talks predominantly to the investment industry, there are important considerations for the mortgage market too.

Just over a year earlier David Geale, Director of Retail Banking at the FCA, delivered a speech at the London Institute of Banking & Finance mortgage conference. In it he said that green mortgages have a growing role to play in decarbonising the UK’s housing stock by helping borrowers to improve the energy efficiency of their homes. He called it “a systemic issue” and was very clear that every part of the housing value chain has a role to play – including mortgage lenders and brokers.

He warned that lenders risk missing their decarbonisation targets if they don’t evolve their support for homeowners to enhance energy efficiency, one of several reasons why brokers can expect to see an increase in green mortgage products and innovation. Brokers have a “key role to play” in helping borrowers navigate a complex and nuanced landscape in terms of green home finance, he said and he noted “various Consumer Duty considerations for ESG products centred around suitability”.

“The more specific a consumer is about their requirements, the more specific a broker will need to be in the advice they give to them,” he added.

A year later the Green Finance Institute launched its Certificate in Green Mortgages training course, accredited by the London Institute of Banking & Finance and designed for those across the mortgage advice and lending sector looking to increase their understanding of green home finance.

The UK’s 29 million homes constitute the oldest housing stock in Europe, with almost a quarter of the UK’s total carbon emissions coming from buildings. According to the Climate Change Committee, it will take an eyewatering £250 billion worth of investment to upgrade the UK’s homes to meet the UK’s net zero commitments by 2050.

The onus on lenders to get a move on is very clear and, indeed, the market has seen significant growth over the past five years. According to the GFI, the green mortgage market has grown from four products in 2019 to 61 in 2024.

‍

New Twist

Now, Halifax – part of Lloyds Banking Group and therefore the biggest mortgage lender in the country – has come out with a twist on the green mortgage. In December, the lender announced it will use a property's energy performance certificate rating in its affordability calculations.

“We are now able to better reflect the impact of home energy costs, and some of the financial benefits of more energy efficient homes,” it said in a note to brokers. Amanda Bryden, Head of Halifax Intermediaries, told trade press: “At Halifax, we’re now factoring in property energy efficiency, to better reflect likely annual energy costs, when looking at how much customers can borrow. Our data analysis shows that customers who have a more energy efficient property, with an EPC rating of A or B, usually have lower bills. Therefore, we’ll be able to lend more to them than if they were buying a property with a lower rating.”

It’s undoubtedly a big step forward in the march towards cutting the UK’s residential housing stock’s energy emissions – and by using affordability as a carrot for borrowers who want to move up the ladder (as well as get a foot on it) the lender has potentially cracked the challenge of spurring demand for green mortgage finance.

The question is now how energy performance assessments are made on a more frequent basis. As the rules stand, it’s only necessary to renew an energy performance certificate every 10 years – making its relevance something of an unknown quantity years down the line from issue. On 4 December the government announced this issue is now under consultation as part of its Reforms to the Energy Performance of Buildings regime.

‍

The consultation includes proposed reforms to enhance the regime in five areas:

• updating what EPCs measure through additional metrics
• updating when energy certificates are required by refining the rules for obtaining EPCs and Display Energy Certificates
• managing energy certificate quality
• improving the accessibility of building performance data
• strengthening the quality of air conditioning inspection reports

‍

Legislative change takes time, however, and there are other ways to skin the cat in the interim – as well as to strengthen both affordability and energy efficiency risk management in future. Algorithmic analysis has to form part of lenders’ assessments, and we are already providing those to many lenders – it’s now game on.

‍

‍