Mortgages For Eco-Homes Explained

If you’re one of the growing numbers of environmentally aware home buyers in the UK, you’re probably wondering if there are any benefits to eco-home mortgages.

In this article, we’ll examine what qualifies as an eco-home, which mortgages can be used to buy one, and how to ensure you get the maximum rewards for choosing a more environmentally friendly dwelling.

Can you get a mortgage for an eco-home?

Yes, getting a mortgage to purchase or build an eco-friendly home is possible. In fact, with a noticeable growth in public environmental concern in recent years and the government’s commitment to achieving an EPC rating of C or above on all domestic properties by 2035, the demand for this type of mortgage product is increasing quickly.

Lenders are beginning to reward homebuyers’ environmental efforts by offering ‘green mortgages’ with various incentives and benefits. In a relatively short time, the number of specialist green mortgage products on the market has increased from 78 to upwards of 400, so there is plenty of opportunity, provided you can meet lender criteria.

What is an eco-home?

Eco-homes are often purpose-built to have a lower environmental impact than the standard residential property. Sustainable and/or recycled materials are typically used, as well as building methods that produce a smaller carbon footprint than traditional techniques.

Although many of the larger property developers focus on improving the EPC rating of their new properties, those homes designed specifically to minimise their environmental impact tend to be built by individuals creating their dream homes.

An older home that’s been renovated to improve energy efficiency and/or reduce its environmental impact may also be considered an eco home by certain lenders. This could include where solar panels, double glazing or insulation has been installed to improve the property’s energy efficiency.

How does an eco-home mortgage work?

There is a wide range of eco-home or ‘green mortgages’ available. They work in exactly the same way as any other mortgage, but lenders offer benefits to reward environmentally conscious purchases.

Each lender uses its own measures to determine whether your chosen property qualifies as an eco-home for their specific green mortgage products.

However, they are typically looking for

• Homes with an energy efficiency rating of A or B
• Homes with an EPC rating above a certain level (usually upwards of 80)
• A certain level of carbon neutrality

The criteria are often easier to meet if you’re purchasing a new build home, and some lenders restrict their green products to new builds only, however, there are options available for older properties that have been upgraded to meet the above criteria.

What types of mortgages can be used?

The type of mortgage you need will depend on whether you intend to purchase a ready-made eco home, renovate an older property that you already own, or buy or build your own.

Self-build mortgage

As few eco-homes are available in the UK, perhaps the most common type of mortgage currently used for an eco-home is a self-build. As funds are released in stages with self-build mortgages, this can be an efficient way to borrow the necessary amount to build a purpose-built eco home. It provides money as and when needed, and as you only pay interest on the sum already released, the amount payable overall is lower when compared to taking the entire loan in one lump sum.

As building materials and processes used in this type of project are often classed as non-standard construction, not all self-build mortgages are suitable for an eco home. However, an increasing number of lenders are providing specific eco-home self-build mortgages.

Green development finance

Whilst currently available to a lesser extent than green mortgages, ‘green bridging loans’ are beginning to pop up in the UK. Bridging lenders offer similar incentives to green mortgage lenders, such as more competitive rates and cashback.

Bridging loans can be particularly helpful if you’re buying an unmortgageable property or simply one that does not yet qualify for a green mortgage to improve its eco-credentials.

Buy-to-let

Given the impending regulatory changes for rental accommodation, the incentive for buy-to-let landlords to improve their portfolio’s green status is somewhat more urgent. From 2025, all rental properties will need to achieve an energy efficiency rating of C, which means that the demand for eco-home buy-to-let mortgages is fairly high.

Most high-street lenders restrict their eco mortgage deals to residential properties. However, specialist lenders offer buy-to-let mortgages and bridging loans for eco-home purchases.

Standard residential mortgage

Unless you’re buying a newly built home from an energy-efficient developer, existing eco-friendly properties are likely to be classed as non-standard construction. This is because the materials used vary from the standard brick and tile house, and instead, they focus on more organic or recycled materials.

It’s possible that you would get a standard residential mortgage for this type of property. However, due to the non-standard construction, the pool of lenders available will be reduced.

Remortgage

Some lenders offer remortgage options to those looking to borrow additional funds to renovate their property into an eco-home at a discounted rate. You could use this type of green remortgage to make the necessary changes to benefit from a green product, such as replacing windows or installing smart heating.

How a broker can help secure a mortgage for an eco property

We’ve discussed the range of green products available. However, to find the one most suited to your needs, it’s highly recommended that you speak with a broker with experience in this area. As a relatively new lending niche, it certainly won’t be something that every broker can help you with, so speaking to someone who understands and can fully explain the various options is essential.

It may be that your property’s  EPC rating is too low for one lender, but another lender would approve it. You may have designed the most eco-friendly and carbon-neutral property possible but cannot find a lender to consider the materials used. You might even struggle to determine which lender’s incentives offer you the best long-term benefits.

Whatever your circumstances and needs, the brokers we work with will be able to tailor their advice to help you achieve your goals. Contact us today to be introduced to a broker with the expertise you need.

How much can you borrow?

As with most mortgages, how much you can borrow depends on affordability. Affordability is typically calculated based on a multiple of your income, except for a buy-to-let property, whereby it’s based on the potential rental income.

Most people can expect to borrow around 4.5 times their household income for residential purchases; however, certain professionals and high-net-worth individuals can sometimes borrow up to 6 times their income.

Regarding eco-homes, some lenders are also willing to lend a higher income multiple if your home qualifies for what they consider to be top-tier eco-friendliness. This is based on the premise that paying less on energy bills will leave more expendable income for mortgage repayments.

You can see how this may work out for you, based on your annual salary, by using our mortgage affordability calculator:

Which lenders offer mortgages for eco homes?

There are now a number of high street and specialist lenders in the eco-home niche, and green mortgages are expected to become increasingly available in the coming years.

Both the incentives and criteria vary from lender to lender, but some examples are:

• NatWest –  Reduced rates are available on 2 or 5-year fixed green mortgage products for residential borrowers with LTV (loan to value) of 85%, as well as cashback, with a valid Energy Performance Certificate (EPC) rating of A or B
• Barclays—Lower rates are available on some of their fixed-term mortgages for homes with an EPC rating of 81 or above or in energy efficiency bands A or B.
• Lloyds doesn’t have a specific green mortgage but is offering to lend additional funds on your current mortgage or when you remortgage to fund eco-friendly home improvements.
• Virgin – Offer a lower rate and flexible repayment options (overpayment and payment holidays) to those buyers purchasing a new-build home with an energy efficiency rating of A or B

If you’re concerned about the green credentials of the lenders themselves, not many currently practice what they preach in terms of sustainability. However, Danske Bank recently launched an entirely carbon-neutral mortgage, and other lenders are expected to follow their example.

Eligibility factors

Depending on the type of finance option you need, the eligibility factors, such as affordability and creditworthiness, will be largely the same as they are when purchasing other properties.

However, some important criteria differences to be aware of are:

• Deposit requirement – Most eco-home mortgages require a larger deposit than other products. This may be as high as 20-30% due to them being either non-standard construction and/or self-build properties, as both are considered higher-risk purchases from a lender’s perspective.
  There are lenders in the niche with lower requirements. However, their other criteria may be stricter. You will unlikely qualify with the 5% minimum deposit that’s typically accepted for standard residential purchases.

• Property Requirements—Each lender will specify the criteria that a property must meet (or you’ll need to commit to a meeting when it’s complete), and you’ll typically need at least an EPC (Energy Performance Certificate) to confirm the level of energy performance achieved.
  Some lenders will only accept newly built properties and may even require that you purchase a property from an approved list of partner developers.

Get matched with an eco-home finance specialist

If you’re looking to purchase or build an eco-home, you’re getting in at the ground level of what’s expected to be the future standard for UK properties, and there are a plethora of benefits to gain, not least future-proofing the value of your new home. That said, this is still a fairly new and complex lending niche.

We work with brokers across the country who are experts in securing finance for those looking to build or buy an eco-home. They can help you find lenders offering the most competitive terms for the type of green mortgage or finance you need.

Get in touch on 0330 818 7026 or make an enquiry today, and our broker matching service will pair you with the most suitable broker for your needs. There’s no obligation, and your initial consultation will always be free.