Can you beat rising interest rates with a green mortgage?

Mortgage payments are rising, but there are ways to mitigate the worst of the effects, says Ruth Jackson Kirby, including getting a “green mortgage”.

Homeowners, spoilt by years of rock-bottom interest rates, are suddenly having to grapple with dearer money. The Bank of England’s base rate has risen from 0.1% last December to 1.25% today, propelling mortgage rates upwards. At the end of 2021 the average rate for a two-year fixed mortgage was 1.4%; that same mortgage now costs 3.74%, according to comparison site Moneyfacts. On a £200,000 mortgage that is a difference of £236 a month.

“Average mortgage rates are the highest we’ve seen since 2013,” Sarah Coles from Hargreaves Lansdown told The Telegraph. “An awful lot of people are going to find themselves having to stretch their money further.”

Should you get a “green mortgage”?

One way to avoid high interest rates is to get a green mortgage. Though this was once a niche product, the number of green mortgages on the market rose by 18% in the six months to April, says financial data provider Defaqto.

Green mortgages are intended to reward people for having an energy-efficient home. You prove to the lender that your home has an energy-performance certificate (EPC) rating of A or B and you either get cashback or a better interest rate on your mortgage.

The potential for big savings has caused a surge in interest in green mortgages. Research by financial advisers Twenty7Tec has found that online searches for eco-loans have quadrupled since last year.

But don’t assume a green mortgage is going to give you the best deal on the market. While interest rates tend to be lower than average you can still beat the rate if you look at the mortgage best buys.

For example, Virgin Money’s Greener Mortgage offers a two-year fixed rate of 3.1%. On a £200,000 mortgage this would save £828 a year, and there is also £300 cashback on offer.

Virgin Money’s Greener Mortgage is competitive but there are cheaper deals. Progressive Building Society has a two-year fee-free fix at 2.84%.

Other ways to save

There are other ways you can temper the rate shock. Overpaying your mortgage while you are still on a low rate can make sense – lowering your loan-to-value (LTV) ratio could move you into a lower LTV bracket, allowing you to receive lower rates.

Most mortgage lenders will let you overpay by up to 10% a year, but check. Get it wrong and you could trigger an early repayment charge that wipes out any benefit of overpaying.

You could also extend your mortgage term. While you could end up repaying for five years longer than planned, this decreases your monthly payment. Moreover, you can always reduce your mortgage term again when interest rates fall.

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