Mortgages & housing
Embracing the green agenda
September 2007
Demand for green products and services is rising. Paul Thompson of eaga Professional Services considers what this means for lenders
Many organisations have been embracing what can be broadly termed the ‘green agenda’, and in the past few months a number of lenders, small and large, have thrown their green products into the arena.
The Building Societies Association and the Council of Mortgage Lenders are both making positive noises and the Energy Savings Trust (EST) and Energy-efficiency Partnership for Homes have been highlighting what appears a heaven-sent – or at least EEC-sent – opportunity in the form of the Energy Performance Certificate (EPC).
Green mortgages have been around since 1981 when a group of environmentalists at a Green Party conference decided to club together with £500 each to start a building society. The Ecology Building Society has now grown to nearly £70 million in assets and has recently moved to a showcase HQ in West Yorkshire, made as far as possible of recycled materials, sustainable timber and straw bales, embodying the best principles of sustainable development.
All of the Ecology’s lending has some form of environmental payback, and it recently set the pace in the green mortgage arena by launching the ‘C-Change’ mortgage. This offers existing and new borrowers a 1 per cent discount below the society’s standard variable rate on the financing of a range of energy-efficiency measures including insulation, glazing and heating improvements and renewable energy installation.
The Norwich & Peterborough Building Society and Co-operative Bank offer their own version of green mortgages and access to a greater choice of financial products, offering energy assessments and carbon offsets. Carbon offsetting is valuable, but in itself doesn’t encourage homeowners – or their properties – to be more energy-efficient.
Energy mortgages
The Liberal Democrats recently floated the concept of energy mortgages, used specifically to finance home energy-efficiency improvements. Energy mortgages would be tied to a property rather than an individual, and the repayments tagged on to the property’s energy bills. The idea is that as well as lowering the carbon footprint of a home it would also cut fuel bills. Support for this concept does appear to be growing among MPs; whether the lending market shares this enthusiasm remains to be seen.
Of course green financial products don’t have to be mortgages and could, for example, take the form of an unsecured loan. Indeed, some of the most cost-effective energy-efficiency measures such as insulating hot-water cylinders, cavity walls and lofts don’t cost the earth and have shorter payback periods, while some grant funding may be available. Homeowners may not want to add this finance to their long-term mortgage debt.
Carbon emissions
Whether lenders decide to develop green financial products and the extent of any incentives will be driven by commercial considerations. However, the government has set a challenging target to cut carbon emissions by 60 per cent from 1990 levels by 2050 and this won’t be achieved without tackling the energy-efficiency of the existing housing stock – which accounts for over a quarter of UK CO2 emissions – and without cross-industry co-operation.
The Energy Performance Certificate (EPC) does represent a unique opportunity to make lasting reductions in carbon emissions, and lenders have an important role to play that sits well with corporate social responsibility (CSR) and could help them to retain borrowers. The EPC is the catalyst, but in any event there is a strong case for lenders to promote energy-efficiency more widely to their borrowers. It was good to receive a home energy-efficiency leaflet with a recent secured loan promotion.
Providing green information
Regardless of whether lenders develop green mortgages, they should act as a trusted and timely source of information. Your customers will be both obtaining and receiving EPCs, then making decisions on what action to take and how to finance any improvements. Lenders should anticipate and prepare for typical questions and provide contact numbers for further information.
The Energy Savings Trust (www.est.org.uk), its network of Energy-efficiency Advice Centres, and the Energy Advice Providers Group of the Energy-efficiency Partnership for Homes (www.eeph.org.uk) are useful sources of independent advice. The EST Prime Mover leaflet is a good starting point.
Householders – and consumers – will clearly want a basic understanding of how an energy-efficiency installation or upgrade and any associated technology works, how much it will cost, who they could trust to do it and whether it would be cost-effective. What is the payback period, will it add value to the property and what is the best way to finance it?
Perennial critics of everything green will argue that going green costs more, it’s a niche and people simply won’t bother. With energy bills going through the roof, the wettest summer on record so far and the risk of extreme weather forecast to continue ‘green is going mainstream’.
Armed with the facts, the finance and ideally a simple integrated solution, the great British public’s growing appetite for energy-efficiency surely cannot be ignored.
Green HIPs
We’re off, Home Information Packs are up and running. No matter what you might think of them, they are part of our industry and we have to have them. We all know that their primary purpose is nothing to do with assisting the home buying process but to act as a vehicle for our government to partially satisfy the European Directive on the Energy Performance of Buildings. We say partially because the directive applies to all types of buildings, not just private housing and there will be a further furore when the commercial buildings are included.
So are they a good thing or not? The government hopes that by demonstrating how inefficient our homes are, emitting carbon in massive amounts, we will all rush out and insulate them to reduce the emissions and cut down our costs. But will it?
Boilers and fridges
Look at central heating boilers. The industry used to provide a wide range of boiler types with varying levels of efficiency and similarly varying costs and sizes. Then the Building Regulations were amended and now you are hard pushed to find a boiler that doesn’t fit into the most efficient band.
In the past, when we bought fridges and freezers we did so on the basis of size, appearance and cost. Their efficiency rating was buried deep in the technical information and you needed to have a specialist’s knowledge to compare one with another. Now, the efficiency ratings are plastered across the front of all of the models and woe betide any manufacturer who tries to sell the least efficient grade.
Social housing sector
On the whole house front and particularly the measurement of a house’s energy efficiency, the social housing sector has been leading the way, carrying out energy efficiency surveys for some years. These assessments were part of the Decent Home initiative launched by the government in England and Wales back in 2000. The initiative is now so heavily embedded that the vast majority of social housing has been upgraded and their efficiency is far superior to the private housing sector.
So will the display of EPCs in the housing resale market make a difference? I think they will. Just as having a gas fired central heating system is now ‘de rigueur’ rather than an open coal fire, so the ‘C’ rated home will become the minimum and the ‘A’ rating will be aspired to by all, other than the brand new, who will be ‘A’ rated anyway.
But I would say that, wouldn’t I? As a provider of EPCs and part of one of the largest energy efficiency providers in the country, I must believe that attitudes will change. But let’s wait and see and I’ll avoid saying I told you so.
Peter Fall is managing director of Clear Building Survey, part of eaga plc, and a former president of the Royal Institution of Chartered Surveyors
Balance Trading in urban areas
The government has announced its ambition for all new homes to be zero carbon by 2016. The Code for Sustainable Homes has set out a series of interim steps that will lead to the eventual delivery of this goal.
The main issues that will need to be overcome are the technical requirements and costs incurred by the development and deployment of new technology. Government estimates that the costs involved will drop once substantial volume demand is established. At the moment estimates suggest the cost of achieving zero carbon is some £30,000 to £40,000 per home.
On greenfield sites, the opportunity for substantial uplift in land value could allow this level of cost to be met. In contrast, small dense urban developments are much more difficult to deliver in terms of low carbon solutions. The nature of these sites often hampers the deployment of sufficient levels of new technology such as wind turbines or solar thermal systems.
Balance Trading
An alternative for these types of difficult sites may be the proposal put forward by the Sustainable Development Commission to link these new developments to existing homes. This involves calculating the amount of CO2 that would be emitted from the new development and then undertaking work to save the same amount by improving existing homes. The installation of insulation and potentially renewable energy systems in the existing homes would be based on the published Defra (Department for the Environment, Food and Rural Affairs) guidance and be designed to save the same amount of carbon as emitted by the new development.
This approach of Balance Trading offers the opportunity of making urban developments carbon neutral. At the same time it is affordable, thereby allowing essential local infrastructure to be supported by the development.
It is perhaps also worth pointing out that if neighbourhoods in the vicinity of a proposed new housing development are likely to benefit from free insulation – warmer homes and the potential for lower fuel bills – then nimbysm syndrome is less likely.
Over the past six months, eaga plc has been working with the Department of Communities and Local Government (DCLG) – formerly the ODPM - HM Treasury and Defra on the application of this approach to the challenge of making urban sites carbon neutral. This has led to the incorporation of Balance Trading by the East of England in its draft Regional Spatial Strategy through a DCLG-sponsored amendment.
Benefits
In summary, Balance Trading allows:
• difficult urban sites to be made carbon neutral in a simple and robust manner;
• existing residents to benefit directly from new development in their area;
• development to continue supporting local infrastructure and affordable housing needs
• all savings to be verified in accordance with published Defra framework.
Household energy accounts for almost a third of the UK’s carbon emissions. Pressures to reduce this are obviously going to increase as the government aims to meet its key CO2 reduction targets. Whether it’s offering green mortgages, providing more information and advice to homeowners through HIPs and EPCs or building zero carbon homes, energy efficiency is key.
Mitesh Dhanak is associate director at eaga plc
Helpful glossary of terms
Carbon neutral is generally accepted as meaning that the net carbon dioxide emissions from a building or operation are balanced with offsetting activity that cuts carbon dioxide emissions by the same amount. The net position is therefore neutral. Types of offsets include Balance Trading, purchasing emissions trading credits or funding activity in the developing world.
Zero carbon is where an activity (whether a development, building or operation) results in zero emissions of carbon dioxide due to the use of renewable energy. For developments, the government argues that the renewable energy source should be located on-site.
Carbon dioxide CO2 is a chemical compound composed of one carbon and two oxygen atoms. In its solid state, it is called dry ice. Carbon dioxide is the most important greenhouse gas. According to The government it contributed 85 per cent to the UK’s total greenhouse gas emissions in 2004.
Typically, energy efficiency work carried by eaga on an average three-bedroom home can cut annual carbon dioxide emissions by a tonne.
So what does a tonne of C02 actually look like?
Visualising measures of weight is extremely difficult – even more so when it’s a gas such as CO2. Scientists writing in the BBC’s Home Planet website have, however, equated a tonne of CO2 at a standard temperature and pressure as being equal to 679,000 bottles of wine – or 56,583 cases.
Executive summary
• Green mortgages go back to1981 when a group of environmentalists at a Green Party conference decided to club together £500 each to start the Ecology Building Society. It has now grown to nearly £70 million in assets.
• The concept of energy mortgages could be used specifically to finance home energy efficiency improvements. The mortgage would be tied to a property rather than an individual, and the repayments tagged onto the property’s energy bills.
• The social housing sector has been carrying out energy efficiency surveys for some years. The vast majority of social housing has been upgraded and their efficiency superior to the private housing sector. These assessments were part of the Decent Home initiative launched by the government in England and Wales in 2000.
• Government estimates suggest the cost of achieving zero carbon is £30,000 to £40,000 per home.
• Balance Trading is a proposal to link new developments to existing homes by calculating the amount of CO2 that would be emitted from the new development and then undertaking work to save the same amount by improving existing homes.
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