Help-to-Buy mortgages in Wales will be assessed against property's energy efficiency rating, with buyers of better-insulated homes able to borrow more money
The battle to get on the housing ladder has never been tougher. House prices have risen so dramatically in the last couple of decades that earlier this week an influential think tank even suggested millennials should be given £10,000 each to help them bridge the financial chasm that has opened up between younger people and older generations.
The so-called "citizens inheritance", proposed by the Resolution Foundation to help address generational inequality, would help redistribute wealth and help younger citizens towards a deposit to get on the housing ladder, the think tank argued.
But other strategies for tweaking the economics of the housing market are emerging, which could help make the cost of owning a home more affordable and cut carbon emissions at the same time.
Today Wales will announce it is to become the first country to ensure all its Help To Buy top-up loans are assessed against the energy efficiency of the property purchased. In simple terms, the change means buyers of more energy efficient homes will be able to borrow more money than buyers of less energy efficient ones.
Currently lenders use a combination of information provided by prospective homebuyers, and data from the Office for National Statistics (ONS), to calculate the proportion that energy bills make up of a household's expenditure, as part of a wider process to work out how much a customer can afford to pay back each month. Crucially, these calculations do not currently take into account the relative energy efficiency of a property.
Today's announcement, which will take effect from next month across Wales, could vary the maximum mortgage offered by as much as £11,500 between the most energy efficient and energy-hungry homes. The move applies to loans issued to first time buyers by the Welsh Development Bank, over and above a primary mortgage.
The strategy is based on research published last year by the LENDERS project, a consortium of partners from across the construction and property sector including Arup, BRE, Constructing Excellence Wales, the Energy Saving Trust, Nationwide Building Society, Principality Building Society, UCL Energy Institute, and the UK Green Building Council.
Although the value of mortgages could increase by up to £11,500 under the scheme, the average amount more homebuyers could expect to borrow would be closer to £4,000, LENDERS estimated.
Speaking to BusinessGreen, Andy Sutton, associate director of BRE Wales, said that while only a small fraction of homebuyers ever borrow the maximum amount available to them, the hope is that by inserting energy efficiency as a consideration right at the start of the buying process, attitudes will start to shift.
"The amount of money that changes in terms of the maximum mortgage lending amount is comparatively small compared to the total amount of mortgage," he said. "But what we very much hoped was it was a behaviour change trigger, so because people were being asked about Energy Performance Certificates it would start to influence purchasing behaviour because they would get given slightly more capacity to borrow for lower energy homes. All of that expectation was that it would start to drive consumer behaviour around home buying."
Most experts agree the current housing market needs disrupting to drive energy efficiency up the priority list for both buyers and developers. Private residential properties account for around 15 per cent of the UK's total carbon emissions, and bringing this figure down is not proving easy. Energy Performance Certificates (EPCs), were meant to go some way towards helping curb domestic emissions by encouraging people to purchase more efficient properties. Introduced in 2007, all UK properties must come with an EPC rating when they are offered for sale or rent. But EPCs alone are not driving change in the market nearly as fast, nor as widely, as the UK needs to meet its carbon emission targets.
Government acknowledged the scale of the challenge in its Clean Growth Strategy last year, establishing the Green Finance Taskforce to explore new ways the money markets can drive demand for low-carbon infrastructure such as housing.
In its report last month, the Taskforce called on lenders to better promote awareness of green factors in their lending decisions in order to 'mainstream' environmental factors in the house buying process.
It appears to have had a galvanising effect on the mortgage market. Last month Barclays became the first mainstream bank to launch a green mortgage, offering cheaper interest rates to buyers purchasing energy efficient new build homes.
Under the deal, homeowners benefit from preferential interest rates on two- and five-year fixed rate mortgages. The offer is open to people with a deposit as low as 10 per cent, and on Help To Buy mortgages for those with a deposit of 25 per cent or more.
Both the LENDERS initiative and Barclays' green mortgage product are trying to deliver the same outcome, said Sutton. "We need to drive homebuyers to understand that energy efficiency is important and it does have an impact on their own pocket," he said. "And If that impact comes through lower fuel bills or a lower interest rate, then ultimately the same driver comes through for the homebuyer."
The Welsh government, meanwhile, hopes the scheme will improve the affordability of housing for cash-strapped first time buyers. "We know that energy spending can be a major household outgoing, which is why we want to make energy efficiency part of the consideration when people look to buy a home in Wales," said Welsh housing minister Rebecca Evans.
But Sutton also suggested it could have a longer term impact on the market by permanently altering expectations of mortgage applications and the house-buying process. "As first time buyers, their first experience will be that their mortgage lender asks them about the energy efficiency of their property," he predicted. "So in terms of the behaviour element, it may well be that from that point forward their experience of mortgages are that you get more money if you buy energy efficient. It may embed that behaviour for the rest of their home buying life."
For the LENDERS project to fundamentally change the way the mortgage market operates, commercial mortgage providers will need to adopt the new assessment strategy. Many will no doubt be watching the results of the Welsh Development Bank's move closely. But one thing is clear: if we can restructure the process of buying a home to favour cheaper, greener properties, millennials might be less in need of that £10,000 cash bonus after all.
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