Despite their slow start (first launched in the UK market in 2006), green mortgages have grown in popularity in recent years to the point where they are becoming a central part of traditional mortgage offerings, with more than a dozen lenders offering now a variety of green mortgage products.
There is no universal definition of a green mortgage, but there are common features across all green mortgage products currently available in the UK. Most green mortgage products can be divided into two categories:
- A mortgage that offers customers a reduced interest rate when building or buying an energy-efficient home.
- A secured homeowner’s loan to finance the improvement of the energy efficiency of an existing building. The borrower will typically need to spend at least half of the borrowed amount on specific energy efficiency improvements or upgrades that raise the property’s Energy Performance Certificate (EPC) rating to a specified level.
The main difference with a green mortgage compared to a conventional mortgage is the link between the cost of borrowing and the energy efficiency of the mortgaged property. For a lender, one of the reasons why green mortgages may be attractive is that a property’s energy efficiency is a factor that can help predict the likelihood of a borrower defaulting on their mortgage – this claim has been supported by a growing body of research, including publications from the Bank of England.
In terms of how green mortgages are regulated, the UK has a mature regulatory system for mortgages, and much of the existing regulation works for both green mortgages and mortgages. conventional. However, there is an opportunity for the government to introduce tailored regulatory support to encourage the growth of the green mortgage market, for example by introducing a government-backed green loan guarantee scheme – particularly given the contribution that green mortgages could make to the goal of achieving net zero greenhouse gas emissions.
Indeed, in the March 2021 referral letter to the Financial Conduct Authority (FCA), the Treasury asked the FCA to integrate climate change considerations so that every financial decision takes climate change into account. The following month, the Treasury Committee, which is one of the select committees of the House of Commons, issued a report stressing the importance for the FCA to have the appropriate attributions, powers and priorities to prevent the ” green laundering” of financial products. It is likely that tailor-made regulations for green mortgages will arrive soon.
Lenders interested in creating green mortgage products and currently offering conventional mortgage products will not need to make significant changes to their client documentation in order to create a suite of documents for creating green mortgages. For example, in the case of a green mortgage for the purchase of new construction, the mortgage application form may need to be completed to capture the property’s EPC rating. For a green mortgage to retrofit an existing property, the application form may need to capture details of the proposed energy improvement works.
Changes to online broker portals may also be required to fully capture this data, as well as updates to mortgage terms and conditions to explain when the reduced rate applies or what the process for claiming reimbursement is. .
A practical point for lenders in the English market to take into account when amending their mortgage documentation is that any new model mortgage deed must generally be pre-approved by the Land Registry. For lenders active in the Scottish market, it is important to remember that new mortgage terms are usually filed in Scotland with a public register called Books of Council and Session.
Options for lenders
When it comes to financing structures that can be used by lenders to fund their green mortgages, a number of options are available. The most common methods of financing green mortgages are: using customer deposits; issuance of unsecured notes; and entering into structured finance such as covered bonds, mortgage-backed securities, forward flow agreements or mortgage warehouse finance.
As a company at the forefront of the green recovery, Shepherd and Wedderburn helps banking and financial clients design and implement sustainability-focused products and services and has released an insightful report guide to green mortgages.
Andrew Graham-Smith is a solicitor at Shepherd and Wedderburn