Surveyor Blog: Valuation for Green Mortgages

Written by our Senior Regional Surveyor, Hugh Riley, this is an area of increasing interest to surveyors and valuers. The government has just released a consultation document “Improving Home Energy Performance through Lenders”.

Green Mortgage A Rated

One of the impacts of COVID on the housing market is that home buyers are looking for greener properties – not just ones that offer green space; but, with more people working from home, ones that are greener, with regard to energy use. Public consideration of the energy efficiency of their homes is likely to become a greater priority at the outset of purchase and borrowing, especially if such behavioural change is encouraged by lower borrowing rates and central government. This future green building business opportunity is increasingly being noticed by both mortgage lenders and surveyors and attention will be focused more sharply now with the publication yesterday by the government of a consultation paper, “Improving Home Energy Performance through Lenders”.

One of the unintended consequences of COVID, with decreased local and national travel, has been a dramatic decline in carbon emissions and air pollution. It is inevitable that government will place greater emphasis on housing energy efficiency in the future to meet the net zero 2050 carbon emission targets of the Paris Agreement and UN Protocols. Whilst property contributes significantly to national energy use and carbon emissions (residential properties make up 15% of the UK total climate emissions), new build housing only accounts for 1-2% of total overall building stock each year. So, retrofitting of existing homes will also be essential to accelerate the pace of meeting these central ambitions.

The RICS recently released a paper on decarbonising, suggesting that retrofitting and home improvements would help boost the recovery economy. The paper highlights how government and lender incentives could promote positive consumer behaviour and encourage more homeowners to consider making their homes energy efficient to meet revised Minimum Energy Efficiency Standards.

Previously the preserve of specialist lenders, several high street lenders now offer green mortgage products. This is being stimulated by government innovation funds to improve the standard of homes and encourage green mortgages to become a mainstream offering and to act as a catalyst for the industry. Government Green Finance innovation funds are also trying to stimulate ways of reducing the cost of retrofitting housing stock, such as offsite pre-assembly of replacement building parts for quick onsite fitting to minimise disruption for homeowners.

Lenders are taking note of such initiatives for both new and existing homes, with increased statistics from green market transactions. Eco-friendly mortgages are available to borrowers for two types of property: new build homes with a current sustainability rating, or renovation of an existing building to improve its environmental performance. Property with “A” or “B” EPC ratings (including after improvement) may be eligible for green mortgage products and homebuyers can be offered better borrowing rates on mortgages in return for purchasing more energy efficient homes or committing to implement energy saving work within properties.

Specification standards for retrofit have been developed as part of the Each Home Counts Process and are detailed in PAS 2035. This provides the best practice framework for energy retrofit of domestic buildings. Typical retrofits include energy efficient home improvements such as: an air source heat pump, cavity wall insulation, floor insulation, loft insulation, low energy lighting upgrades, hot water cylinder insulation, draft proofing, double glazing, replacement windows, electric car charging point, a ground source heat pump, a small-scale wind turbine, solar water heating, solar photovoltaic panels and tanks and pipes insulation.

A report by EeMAP has explored the relationship between energy efficiency and borrower’s reduced probability of default, linked to lower utility bills and the increase in green value of energy efficient properties. It is considered that these green homes may be more resilient to increased change in market perception of energy efficiency, than those properties which require a “brown discount” due to dated fittings or construction, resulting in poor EPC ratings.

If the “loan to value” ratio picture looks healthier, for banks, this may also lead to loans which represent a lower risk on their balance sheet and could therefore qualify for a better capital treatment by financial regulators. Whilst reduced energy costs of the building make loan non-payment less likely, it is also possible that people who live in more energy efficient homes may be less likely to default for other demographic reasons such as employment profile. Green mortgage property will however enable banks to recognise “energy efficient” assets in their risk portfolio, which would begin to help the market to price-in the added value of energy efficient real estate. It is anticipated that there will be a clear emergence of value difference, between low and high energy homes, assisted by green mortgage borrowing products.

To support stakeholders, property data sources such as Rightmove and Hometrack, are putting additional green resource into surveyor reporting tools to draw on Energy Performance Certificates (EPC) and energy efficiency information. This will help surveyors as they compare and value green features in homes. Advanced analytics are also being used to bring such features to Automated Valuation Models (AVM) to understand green impact on value. Identifying this value difference is key to bespoke new low energy home building and existing home low energy refurbishment solutions. Establishing the combination of energy efficiency and end value, to show low energy homes have better future value – and support the cost of building or refurbishing these homes, will define finance options and reduce mortgage lending risks.

As this area evolves valuers are going to need to consider how to place increasing importance on attributing value differences for energy efficient and low carbon homes and green features, with particular reference to RICS guidance. Improved energy efficiency, lending products and market recognition will stimulate market change and add statistical comparable data. Residential surveyors and valuers will need to reconsider their own green skillset as new surveying products are developed to service the growing shoots of the green home ownership sector, or if EPC ratings are tied to taxation, such as stamp duty.

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