Environmentally-friendly solutions have become more important than ever, and sustainability is at the forefront of modern building design. But, can eco-friendliness extend to loans themselves? And what does that mean?

What is a green mortgage?

Contrary to what many initially presume, green mortgages do not involve the lending institution passing on any profits to environmental causes. Still, they do work towards reducing the UK’s domestic emission levels by encouraging borrowers to improve their home’s energy efficiency. 

A green mortgage is a type of finance used to purchase property, much like a traditional mortgage; the key difference is that the property in question must meet specific energy efficiency standards to be eligible. Lenders also typically offer lower interest rates for green mortgages than the rates on their standard mortgages. The concept of green mortgages is that homeowners are incentivized to improve the energy rating of their home to access better interest rates, as well as to make their home more desirable in the event of selling.

To qualify for a green mortgage, your property typically needs to hold an Energy Performance Certificate (EPC) rating of at least B. You can achieve this by buying a property that is already sufficiently energy-efficient, or by renovating your current property to improve its eco-friendliness. 

What is an EPC rating?

An Energy Performance Certificate (EPC) is a certificate that is issued to a property detailing its current energy efficiency rating, as well as suggestions for how to improve it. The rating given via EPCs will range from A (the best energy efficiency) to B (the worst). EPC ratings last for ten years.  

If you own a home in England, Wales, or Northern Ireland and are unsure what your property’s energy rating is, you can usually find it via the gov.uk website . For properties in Scotland, there is a separate register . 

Is a green mortgage the same as an eco mortgage?

Many providers use the term ‘green mortgage’ and ‘eco mortgage’ interchangeably to refer to the same product or set of products.

That said, an eco mortgage is also the term given to describe a mortgage on a property that is built in an environmentally-conscious way using only sustainable construction materials. Because such a home can be a little trickier to obtain a mortgage on, some lenders offer specialised products, often calling them eco mortgages. 

How do green mortgages work?

Essentially, a green mortgage is no different from a standard mortgage in terms of product type and how they run. The application process is the same, as is the structure of the loan and the requirement to make monthly repayments that include interest charges. The only difference is that your property’s EPC rating forms part of the eligibility criteria, and hopefully, you receive a reduced interest rate in return. 

It is important to note that, while most lenders do offer their green mortgages at a reduced interest rate, this does not guarantee that a better deal on a standard mortgage couldn’t be found elsewhere. Therefore, it’s essential to shop around to ensure that you are getting the best rate and product, regardless of the green element. 

As previously mentioned, there is nothing inherently ‘green’ about the mortgage itself. The only environmental aspect of green mortgages is that your home’s energy rating is having a positive impact on the environment. Once your rating is up, and your property is running in a more eco-friendly fashion, that will be the case regardless of your mortgage product. 

How to qualify for a green mortgage

If you are buying a property with an EPC rating of B or above (and you meet all other generic mortgage eligibility criteria), you should qualify for a green mortgage.

If, however, your property’s EPC rating is below a B, you will need to carry out the necessary renovations to bring it up to that in order to qualify. Remember that your EPC will include suggestions as to how to improve your property’s energy efficiency. Carrying out home improvements such as installing solar panels, replacing windows and doors, and upgrading insulation are common ways of improving a home’s energy efficiency. 

Remember that all other aspects of a mortgage application will still apply. For example, you will still need to provide all financial information for lenders to assess your ability to repay the loan. 

Is it worth getting a green mortgage?

In most cases, yes. While not guaranteed, there is the real possibility that you will find a better deal via a green mortgage than a standard option. 

Additionally, improving your home’s energy efficiency can positively impact your borrowing capabilities in terms of affordability – the less your energy bills are, the more available income you can attribute to mortgage repayments. These benefits are also attractive to potential buyers down the track, as green mortgages can make it cheaper to borrow. 

By taking out a green mortgage, you are also doing your bit for the environment. While not directly impactful, green mortgages are designed to incentivise and encourage homeowners to take responsibility for home energy usage. 

Are there any downsides to green mortgages?

No, although it can be a challenge to find one as not all lenders offer them.

Depending on the property, the renovations necessary to sufficiently bring the energy efficiency up may be costly. Still, if it is work you are planning on carrying out regardless, becoming eligible for a green mortgage is just a bonus. 

The only real potential for any downside is by automatically presuming that the green mortgage on offer is the best deal you can get. While it may be the best deal offered by the specific lender, in some instances, a better option can be found by doing a little shopping around. 

Final thoughts

Improving your home’s energy efficiency is always a good idea if it is affordable. Not only are you doing the right thing environmentally, but you can then access potentially cheaper interest rates via a green mortgage. You are also contributing to the overall eco-friendly movement and making your property more desirable in the process.