Long ReadNov 22 2022

Significant barriers to green mortgages remain

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

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.

Nearly all those surveyed expected demand for green mortgages to increase.

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.

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.

There is some nervousness from intermediaries about the extent to which they can consider a customer’s preference for a mortgage product that is not necessarily the cheapest.

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). 

One of the often-cited barriers to consumers undertaking retrofit activity on their homes is the cost associated with the work.

The key obligation on a mortgage adviser is set out in MCOB 4.7A.2R: “If a firm gives advice to a particular customer to enter into a regulated mortgage contract, or to vary an existing regulated mortgage contract, it must take reasonable steps to ensure that the regulated mortgage contract is, or after the variation will be, suitable for that customer.”

Where a firm’s product range includes more than one regulated mortgage contract that is appropriate to the customer’s needs and circumstances and it recommends a contract that is not the cheapest: “The firm must explain to the customer why it is advising the customer to enter into that regulated mortgage contract rather than any other cheaper regulated mortgage contract in the firm’s product range which is appropriate to the needs and circumstances of the customer.”

Anecdotally, there is some nervousness from intermediaries about the extent to which they can consider a customer’s preference for a mortgage product that has environmental benefits where that product is not necessarily the cheapest but would otherwise meet the customer’s needs and circumstances.

Mortgage intermediaries are best placed to help borrowers understand their options.

Green mortgages (and improving the energy efficiency of homes more generally) also needs to become a core part of the syllabus for key mortgage adviser qualifications, such as CeMAP.

This is important because advisers have a central role to play in encouraging energy efficiency and having the conversations with customers both about changes to the regulatory landscape in the housing market and minimum energy efficiency standards, and how to access finance for that work at the appropriate time.

As the main point of contact between customers and lenders, mortgage intermediaries are best placed to help borrowers understand their options.

Adopting alternative finance models to respond to the barriers to retrofit

One of the often-cited barriers to consumers undertaking retrofit activity on their homes is the cost associated with the work, and the related concern that often, if the consumer subsequently decides to sell their property, this is not reflected in the purchase price.

To address this, new innovative finance solutions need to be developed that enable the finance to attach to the home rather than the borrower.

A key part of achieving the government’s net-zero target is improving the energy efficiency of existing buildings.

Recent research from the Green Finance Institute revealed growing consumer appetite for what is referred to as property-linked finance, which is intended to directly address this ‘payback period barrier’.

The Green Finance Institute is proposing to pilot such a product in partnership with the Greater Manchester Combined Authority, which should provide a template for the wider market.

In summary, a key part of achieving the government’s net-zero target is improving the energy efficiency of existing buildings (particularly residential homes). This is even more pressing following the rise in energy prices.

A combined approach between government, regulators and the industry to overcome some of the barriers to innovation that we have identified in this article, could support the consumer finance sector to put in place financing solutions that make energy efficiency measures more widely available to all homeowners.

Robin Penfold is a partner in the green finance team at law firm TLT