The Financial Conduct Authority will take an increased interest in the green mortgage space having noted the potential for inaction on decarbonisation targets from mortgage lenders.
In a speech to be given later today (April 19) at the London Institute of Banking & Finance’s mortgage conference, the FCA’s director of retail banking David Geale is expected to outline the regulator’s commitment to the area.
It is understood that Geale will outline some of the main issues presented by the advent of green mortgages, notably the possibility that homeowners who are not in a position to improve the energy efficiency of their homes may be penalised by mortgage lenders.
Lenders adopting a blinkered approach and targeting only to the most efficient properties would have the unintended consequence — David Geale, FCAGreen mortgages are a self-determined label by mortgage lenders, with no commonly accepted definition. Generally though, products have a discounted fixed rate or offer cashback on properties that have improvements made to boost the energy performance certificate rating.
Green mortgages have been on the rise in recent years as the threats posed by climate change have become more apparent and mortgage lenders have taken steps to help nudge property owners to reduce emissions.
In his speech this afternoon, Geale is expected to highlight the significant role green mortgage products can play in helping borrowers reduce their home emissions.
He will say: “It can be done in a way that avoids rendering some homes unmortgageable, and without leaving borrowers facing insurmountable costs to improve energy efficiency.
“What does the FCA want to see happen in green mortgages? We want to see ongoing innovation from lenders, with compelling incentives that will influence consumer decisions as they seek to improve the energy efficiency of their homes.
“And we will continue to monitor the sector, making sure that where lenders have set out decarbonisation targets for the homes they provide mortgages for, they have a credible plan to achieve them.”
Geale is also set to highlight the role of mortgage brokers and that the FCA wants to see brokers be empowered to support consumers in making appropriate decisions.
Concerns
Despite supporting the concept of green mortgages and green home finance more generally, Geale will also note a number of areas of concern the regulator has.
Last month, UK Finance’s chief executive David Postings said that while lending only to newly-built homes which are already energy efficient may ‘green’ an organisation’s balance sheet, it will not help achieve the goal of decarbonising the UK’s housing stock.
The FCA is to echo this risk, with Geale noting: “Lenders adopting a blinkered approach and targeting only to the most efficient properties would have the unintended consequence of making it difficult or very expensive to secure a mortgage for properties with lower energy efficiency, even if those properties could be significantly upgraded.
“It would also penalise those homeowners who are not currently able to make those improvements without help, and may become – or already be – vulnerable.”
Geale is also expected to raise a concern that innovation in products and incentives could “run ahead of consumer demand”.
“Many people use every last penny they have to simply buy a home, pay the legal fees, stamp duty, removals, and essential furnishings. It may not be practical or feasible to borrow additional money to fund energy efficiency when they first move in.
“It also takes time to adjust to a new home, and several seasons may be needed before you can decide whether a solar panel on the roof is the best option, a ground source heat pump, or loft insulation."
To help address this issue, some lenders are now offering incentives at any point in the lifetime of a mortgage.
This means that lenders can help borrowers decarbonise their home as and when they are ready – rather than only being available at the point of taking out a mortgage, which may be the least practical or affordable time for many.
According to the Climate Change Committee, over 60 per cent of households can achieve levels of energy efficiency that are compatible with net zero for less than £1,100.
Research from last year has suggested that although the mortgage industry has a key role to play in reaching net zero, the vast majority of borrowers do not understand green mortgage products.
At the time, the research led Mortgage Advice Bureau to urge mortgage brokers to help educate clients on green mortgages.
jane.matthews@ft.com
