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Significant barriers to green mortgages remain

Significant barriers to green mortgages remain
(Evelyn Paris/Unsplash)

Green finance, climate risk and sustainability have all risen sharply up the political and regulatory agendas over recent years and have become areas of increasing focus and attention for the consumer finance sector. 

Green mortgages – designed to incentivise customers to improve the environmental performance of their homes – have become the poster child of green retail banking products in the UK. But despite their significant growth in the past 18 to 24 months, there are significant barriers to facilitating the decarbonisation of homes by UK homeowners.

Consumer finance providers have a key role to play in the government’s strategy to decarbonise the UK’s housing stock. However, this requires a combined approach between government, regulators and the industry to overcome some of the barriers to innovation in the retrofit finance market.

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Connected lender liability

The funding of new decarbonisation technology introduces additional conduct and legal risks to underwriting considerations for lenders.

In recognition of this, in late 2021 the Green Finance Institute launched its "Lender’s handbook on green home technologies" to inform financial institutions and industry about retrofit technologies and funding options.  

In many unsecured consumer finance structures for the purchase of goods and services (including retrofit technology) where there is a tripartite relationship between the lender, borrower and supplier, the customer will have the protection of section 75 of the Consumer Credit Act 1974.

This allows a customer to raise a claim against their credit provider if the product or service is faulty, or the supplier breaks its contract with the customer or does not deliver what was promised.

This is likely to continue to be a prominent consideration for financial institutions when funding home retrofit technology, particularly following recent solar panel performance issues, which have in some cases led to significant redress programmes.

The UK government has committed to reforming the Consumer Credit Act and is expected to publish a consultation with its proposals by the end of this year. 

Until this issue is addressed, or financial institutions have greater certainty over how the Financial Ombudsman Service would adjudicate on such complaints involving often new and rapidly changing technologies, it is likely to have a significant impact on how consumer finance providers price and sell products to support retrofit activity.

Advising on the suitability of the product

Research from Leeds Building Society found that four in five mortgage advisers saw an increase in enquiries relating to green mortgages in the three months leading up to the end of 2021 compared to the previous 12 months. Nearly all those surveyed expected demand for green mortgages to increase, with half predicting demand to grow significantly.

It is important that mortgage intermediaries feel comfortable discussing green mortgages and know when to recommend them. In the residential mortgage market, much of the advised sales process is guided by the Financial Conduct Authority’s Mortgage Conduct of Business Rules (MCOB).