Some homeowners living in properties with low energy efficiency could find it difficult or expensive to find a mortgage if lenders take a “blinkered approach” to green finance, according to a Financial Conduct Authority (FCA) boss.
David Geale, director of retail banking at the FCA, delivered a speech to the London Institute of Banking and Finance mortgage conference on Wednesday.
A draft of the speech, published on the FCA’s website, highlighted green mortgages, which include incentives for people to either buy an energy-efficient property or improve the energy efficiency of an existing property.
Mr Geale said: “With over nine million regulated mortgages in the UK, the UK mortgage sector can be hugely influential in helping borrowers reduce emissions from their homes, as well as the costs of their energy bills.”
He said green mortgages are an essential component of lenders’ decarbonisation targets, adding: “While there is massive opportunity here, there are also several inherent risks.”
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— David Geale, FCA
Mr Geale said: “Lenders adopting a blinkered approach and targeting only 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.
“There is also a separate risk that innovation in products and incentives could run ahead of consumer demand.”
He continued: “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.
“And, to help address this issue, we’re now seeing some green mortgages emerging where the incentives are available at any point in the lifetime of a mortgage, meaning 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.”
We also want brokers to be empowered to support consumers in making appropriate decisions, tailored to their expressed needs and preferences— David Geale, FCA
Mr Geale said: “Green mortgages can play an increasingly significant role in helping borrowers reduce emissions from their homes, and help lenders hit their decarbonisation targets, and it can be done in a way that avoids rendering some homes unmortgageable and without leaving borrowers facing insurmountable costs to improve energy efficiency.”
Looking at what the regulator wants to see happen with green mortgages, he said: “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.”
He added: “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.
“We also want brokers to be empowered to support consumers in making appropriate decisions, tailored to their expressed needs and preferences.”
David Postings, chief executive of trade association UK Finance, said in March there is a need to remain vigilant as the housing stock changes to meet environmental objectives.
We need to remain vigilant and stress the need to provide incentives that promote the feeling of security and inclusivity— David Postings, UK Finance
He said in a past speech: “I worry that the easy policy option – pushing lenders to go green at a pace that essentially just greens balance sheets and not the housing stock – might prove hard to resist optically.
“This approach could have the unintended consequence of either creating energy-inefficient properties that are un-mortgageable or penalising those homeowners who cannot make the change easily, through the imposition of higher interest rates or local eco-taxes.
“Both will result in the creation of a new cohort of property prisoners; something that as lenders you would not wish to happen.
“Consequently, we need to remain vigilant and stress the need to provide incentives that promote the feeling of security and inclusivity. The alternative undermines people’s confidence in housing.”
