Green mortgages: how do they work and how much can you save?
Most high-street lenders now offer some kind of green mortgage deal. We look at who’s eligible, how to apply and the mortgage rates and cashback on offer
The number of “green mortgage” deals available to homeowners is growing – but how do they work, and who qualifies for one?
Most high-street lenders now offer some kind of green mortgage. They are usually focused on the energy efficiency of homes, and there are two main types.
The most common approach is to offer those buying a property with a high energy performance certificate (EPC) rating, typically A or B, a slightly better mortgage deal. For example, a lower mortgage rate, cashback or a cheaper fee.
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The other type is an incentive for homeowners who want to improve the efficiency of their property. This could be a preferential interest rate for additional borrowing to fund things like solar panels or heat pumps, or cashback once the improvements are complete.
Last year, Virgin Money launched a retrofit mortgage offering borrowers up to £15,000 cashback to go green. This has now been reduced to £10,000.
Nicholas Mendes, mortgage technical manager at the broker John Charcol, tells MoneyWeek: “Ten years ago, there were hardly any green mortgages. Now more than half of lenders have one.” According to Moneyfacts, there were a total of 765 green mortgages on the market in mid-August.
Research by the Green Finance Institute, which launched the Green Home Finance Roadmap in August to encourage sustainability across the UK mortgage market, found that half of all homeowners would use a green mortgage to help them buy or upgrade to a more energy-efficient home.
With house prices rising, it makes sense to see if you could save money with a green mortgage, particularly if you’re buying an energy-efficient property, or would like to make home improvements like adding insulation, double glazing or solar panels.
About 1.5 million dwellings in England now have solar panels – nearly 6% of dwellings – according to Nationwide.
We look at how green mortgages work, who’s eligible, and whether they represent the best deal on the market.
How do green mortgages work?
A common misconception with green mortgages is that they are more environmentally friendly than conventional mortgages, or that the lender is “green”.
However, the “green” in green mortgages refers to the requirements needed to qualify for the deal.
“It does not mean that your mortgage lender will be investing your payments into green initiatives or schemes,” notes Terry Higgins, managing director of TNHG New Build Mortgages.
About 80% of UK homeowners admit they are not familiar with green mortgages and the benefits they offer, according to a survey by David Wilson Homes.
Higgins gives the following definition: “Green mortgages are designed to reward people living in energy-efficient homes or people carrying out green home improvements, and they can come with various benefits, including cashback, lower interest rates, and potentially the ability to borrow more."
Note that green mortgages have lots of different names, such as Green Reward, Green Living Reward and Retrofit Mortgage.
Who is eligible for a green mortgage?
Green mortgages aimed at home buyers are generally only available for properties with an EPC rating of A or B.
Some lenders will look at the standard assessment procedure (SAP) rating – the methodology behind the EPC – to determine if a property is eligible for its green mortgage.
For example, Nationwide offers a Green Reward for homes depending on their SAP rating. Those rated an SAP of 86-91 will receive £250 cashback and those above 92 receive £500 cashback.
Some green mortgages are restricted to new-build homes that are energy-efficient.
Mendes says that eligibility is a barrier with these products. “Most deals are limited to EPC A or B properties, which means new-builds dominate. Older homes rarely qualify, with fewer than 10% of pre-1900 houses even reaching a C rating,” he says.
In terms of cashback rewards for homeowners making energy-efficiency improvements, you usually have to have your mortgage with that lender to begin with. If you want to install, say, a heat pump or solar panels, you can then look to see if your mortgage provider is offering any cashback.
Some lenders offer lower interest rates or even interest-free borrowing for customers that want to fund green home improvements.
Before applying, you’ll need to check whether your home improvement meets the eligibility criteria, as well as any other terms and conditions.
What green mortgages are available?
Some lenders offer cashback to home buyers taking out their green mortgage.
David Hollingworth, associate director at the broker L&C Mortgages, highlights HSBC, which offers £350 cashback for energy-efficient homes with an A or B rating, while Halifax applies £250 cashback. Nationwide pays out cashback of up to £500.
NatWest offers an improvement to the product pricing, often offering deals with the lowest rates but with reduced fees. For example, it currently offers a two-year fixed rate at 3.88% for purchases up to 60% loan-to-value (LTV) with a £1,495 fee. Those buying a property with an A or B EPC rating can have the same rate but with a lower £995 fee, says Hollingworth.
Barclays offers green mortgages for new-build properties. It has a green deal five-year fix at 3.95% to 60% LTV with £899 fee.
On average, green mortgage rates are lower than standard mortgage rates.
For homeowners making energy efficiency improvements, Nationwide offers interest-free borrowing for two years or five years on a loan worth up to £20,000 for eligible green improvements. This includes a boiler upgrade, solar panels, air source heat pumps, cavity wall insulation, double glazing or replacement windows, electric car charging point and loft insulation. You need to have a Nationwide mortgage to apply.
Meanwhile, Coventry Building Society has preferential further advance rates for eligible improvements.
Halifax offers cashback of up to £2,000 to existing mortgage customers that complete efficiency improvements with its Green Living Reward. The maximum is paid out to those installing a heat pump, £1,000 cashback is paid out for solar panels or a battery, while £500 is awarded for other energy-efficient home improvements.
Virgin Money’s Retrofit Boost Mortgage is slightly different as it involves taking out a mortgage, with a higher interest rate than its standard products, and then getting up to £10,000 cashback that must be spent on eligible improvements to the property being mortgaged.
Is a green mortgage the best deal for me?
A green mortgage deal can look tempting, especially if it undercuts the mortgage rate on the lender’s other products, or perhaps offers a lower fee or some cashback.
However, against the wider market, it might not be the cheapest deal for you.
Mendes comments: “Day to day, we often find that while these products look competitive against a lender’s own range, they aren’t the very cheapest on the wider market. Many high-street lenders will beat competition on price, even without a green badge.”
Hollingworth echoes this: “It’s always important to consider the wider market rather than head straight for a green mortgage. Whilst it could offer a better option, there could still be lenders without a green badged deal that could be more competitive.”
While the Moneyfacts data shows that on average, green mortgages have lower interest rates than non-green deals, Rachel Springall, finance expert at the website, agrees that homeowners and first-time buyers shouldn’t immediately assume that a green mortgage is the best option.
“Green mortgages are a niche part of the mortgage sector and navigating them could be a bit tricky as some might not be the best package for a particular borrower. The incentives offered on green mortgages are mixed, so it would be wise for borrowers to go through the options with a broker,” she notes.
Looking ahead, government targets for net zero housing and lenders’ own pledges, such as NatWest and Nationwide aiming for half their mortgage books to be at EPC C or better by 2030, mean there will be more development in this space, according to Mendes.
“There is genuine momentum, although politics could shift the pace,” he says.
“Right now, green mortgages are more about signalling direction of travel than changing the game on affordability. If incentives strengthen through bigger rate discounts or government support, they could become a much more meaningful part of the market.”
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Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.
She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.
A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.
Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.