Financing Decarbonisation

“The housing and finance sectors need a union of minds”

With the increase in gas prices potentially leaving the most vulnerable families feeling the cold this winter, the efficiency of our homes should be at the forefront of everyone’s minds. It’s 2021, the days of choosing to heat or eat should be far behind us. Alas, here we are with around 25 million homes in need of retrofit works in order for the UK to reach its obligatory status of Net Zero Carbon by 2050. Even new homes being built at this very moment, with full knowledge of a climate emergency, are not being built to net zero standards. If anything, they are actually adding to the problem. Which begs the question – why?

From improved mental and physical health to lower running costs for residents, the benefits of living in a more energy efficient home have been proven time and time again. So why aren’t the most energy efficient homes being clearly recognised as more valuable assets? Shouldn’t estate agents be boasting about our increased insulation rather than our delightful views, our highly efficient heat pumps over our deceptively spacious reception rooms, or our energy generating photovoltaics instead of the block paved driveway? All too often we are romanticised by a home’s aesthetics rather than its ability to comfortably and reliably keep us warm and dry.

With the shift in awareness needs to come a shift in perspective when valuing our homes so that the next generation of home buyers aren’t left out in the cold too. In my past life as a Sales and Lettings manager I can count on one hand the number of times a prospective purchaser questioned a home’s Energy Performance Certificate (EPC). It would appear that once affordability in relation to the purchase price is established, there is little to no consideration (nor emphasis) set aside for the ongoing costs of running and maintaining the home. Surely a home in need of tens of thousands of pounds worth of retrofit works should be flagged as such during marketing. Equally, vendors of homes that have already invested in its efficiency should be shouting it from the rooftops!

Thankfully, collaborations such as the VALUER project (Valuation And Lending Underwriting Energy Reduction) led by Monmouthshire Building Society and funded by BEIS are seeking to identify and quantify the value difference between the most energy efficient homes when compared to the least efficient. With their recalibrated mortgage affordability calculator based on findings from the LENDERS project, Monmouthshire Building Society are actually able to offer purchasers of energy efficient homes up to £12,000 more than if they were to buy a poorly performing property. This is due to the recognition of lower associated running costs and future financial liabilities of a home that is already equipped with low carbon technologies.

Given their position as the UKs largest property portal, it’s reassuring that data analysis undertaken by another of the VALUER project partners, Rightmove, has repeatedly identified positive correlations between higher energy efficiency and an increased resale price as well as a shorter period on the market. To enable those who use their Surveyor Comparator Tool (SCT) and Automated Valuation Model (AVM), they have updated the tools so that EPC data can more easily be accessed and compared when a home is being surveyed and valued.

Also working to support the positive recognition of energy efficiency when assessing homes are the Royal Institution of Chartered Surveyors (also a member of the VALUER project) who are currently reviewing the global guidance provided within the Red Book, a property surveyor’s bible. Due to be published in Q1 next year, additional guidance supporting energy efficiency will actively encourage surveyors to consider the current performance of the property as well as its readiness for the installation of further decarbonisation measures.

Whilst all of the above is feeding into the bigger picture, some might say it can’t come soon enough. With BEIS’ consultation on Improving Home Energy Performance Through Lenders at the beginning of the year, it is widely expected that energy reporting will soon become a requirement for mortgage portfolios. This presents opportunities for new and updated financial products to capture this growing market and green washing will no longer cut the mustard within the industry. They’ll need to put their money where their mouth is, literally, and actively seek to decarbonise both new mortgages and existing portfolios.

With the finance sector working to facilitate the improvement of homes, decarbonisation becomes more attainable and the target of a net zero Britain by 2050 starts to feel achievable – though there is still a very long way to go. It’s reassuring however to know that banks and building societies such as Monmouthshire, Principality and Hinkley & Rugby are proactively working to ensure their customers are guided towards the appropriate energy efficiency measures to maximise their home’s potential. Each is running a pilot with Sero to rigorously assess their lending book’s current efficiency so that the homeowners can understand their home’s trajectory to net zero and what it means to them; financially as well as physically. Each pilot will demystify decarbonisation and set it out in real terms, pounds and pence and achievable target dates – no more Kilowatt confusion or Carbon conundrums.

My ask of the housing and finance sectors is for a union of minds, homeowners need to understand from the very beginning of their journey what lies ahead. Agents should be better equipped to deliver this information, whether prompted by the purchaser or not. Surveyors, conveyancers, mortgage brokers, lenders; all these professionals have a duty of care to their clients to ensure that informed decisions are made, based on what we know today and what we know is coming tomorrow. If not, stranded assets that cannot be practically improved may not be identified until it’s too late. Borrowers could default on mortgage repayments as a result of ever-increasing energy costs, carbon-driven taxes or poorly implemented decarbonisation measures requiring recertification. Only once all sectors are aligned will the true value of homes be realised.