Friday, 12 January 2018

Would Green Mortgages make energy efficient homes more affordable?

Do you think lenders ought to take into account the energy efficiency of a house (and hence your energy bills) when deciding how much you can afford to borrow? In some parts of the country there appears to be a price premium for a good EPC rating - the overall average for England is an extra £16,000 for 2 levels of EPC grade (D to B or G to E) [1]. This is good news for owners and further encouragement to people thinking of upgrading their homes, but not necessarily good news for buyers. If lenders did take into account your energy bills, how much difference would that make?

The price premium is highest in the North West and lowest in the East and South East. This is not surprising since you would expect the premium to be low where houses are most scarce and buyers have less opportunity to be choosy.

Fuel spend varies between households by up to £1000/year.
At the moment, lenders generally ignore EPC ratings when estimating your energy bills. Their affordability calculations are based on models of household expenditure that are not accurate and do not even agree with each other because each company has their own model. Fuel spending is only a part of this model but it is an important part. According to the ONS, fuel spend varies from less than £65/month for the bottom 10% to more than £146/month in the highest 10% - nearly £1,000/year difference.

LENDERS fuel bill estimator allows £4,000 more finance for a difference of 2 EPC grades.
The LENDERS project has been working on improving bill estimates to improve affordability calculations. Project partners include Arup, Energy Saving Trust,  UCL, Building Research Establishment, UK Green Building Council and two building societies: Nationwide and Principality [1]. They have found that a difference of two EPC rating grades could bring an additional £4,000 finance. This is a lot less than the difference in sales price - so although the green mortgage calculation would help, it might not help enough.

The difference between 'G' and 'A' rating brings an extra £11,500 in potential finance.

The price premium is more than bill savings reflecting other benefits.
The price premium for an energy efficient house is greater than the bill savings reflecting the fact that the bill savings are often not the main benefit. An energy efficient house is less draughty and heating is more even. You get less temperature drop in the vicinity of cold walls and windows and often less of a temperature difference between head height and foot height; these benefits are good for our health as well as our comfort. Also people on low incomes can afford to be warmer which is a huge plus. You often get more usable space so the effective size of the home is increased: I am not alone in my experience that before retrofit some rooms were too cold to be comfortable but are now usable all year.

LENDERS can predict fuel bills to +/- 20% in 80% of cases.
People vary and fuel costs depend a great deal on our behaviour and sometimes features of the house that do not get into the standard energy use models.  So I am impressed that the LENDERS project found they could explain 67% of the variation in bills using a few variables about the household and property, the latter available from an EPC certificate [2].  They can predict actual bills with +/- 20% accuracy in 80% of cases - not perfect but definitely worthwhile. This is based on their analysis of a dataset of 40,000 homes with real bills and Green Deal Assessments.

LENDERS also investigated maintenance costs for low-energy heating systems and found that for heat pumps these were not significantly different from gas boilers. However, biomass boilers do cost a bit more.

Given the level of accuracy they have achieved it makes a lot of sense for lenders to use energy bill forecasts in their calculations of affordability of mortgages and loans, but we can't expect the extra lending to cover the price premium.

[1] Energy saving measures  boost house prices ( June 2013
[2] LENDERS core report (UK Green Building Council) Sep 2017
[3] The role of energy bill modelling in mortgage affordability calculations (UK Green Building Council) Aug 2015

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