Wales will be the first UK country to offset mortgage lending against energy efficiency rating of new build homes in progressive legislation
Wales will be the first country to adopt pioneering mortgage research into legislation, with first-time buyers expected to reap the benefits. From this June, all Welsh Help-To-Buy loans will be adjusted according to the energy rating of the home being purchased. This will mean that those purchasing the most energy-efficient homes may be offered a larger loan as a consequence of their smaller anticipated energy bills. The change has been implemented based on research by the LENDERS partnership which was published in July 2017.
Part-funded by Innovate UK and involving a consortium of industry experts, and conceived and managed by the BRE, the LENDERS project set out to demonstrate that improved analysis of the likely household energy costs could improve mortgage affordability assessments and potentially allow mortgage borrowers to access a larger home loan.
The LENDERS research successfully demonstrated and modelled the link between energy efficiency and household fuel bills, and created a new consumer calculator (www.epcmortgage.org.uk) to showcase the cost benefits of purchasing an energy-efficient property.
The Welsh Government will be the first to put the research into action following the study’s inclusion in the BEIS UK Clean Growth Strategy, marking the first step towards the significant changes that the LENDERS findings will create in the mortgage industry. Loans will be administered by the Development Bank of Wales.
The more accurate view of expenditure will be used to calculate Help-To-Buy top-up loans, which are available almost exclusively on new build properties of up to the value of £300,000. As new build properties are often classed in the higher rating brackets of energy efficiency, this is likely to open up access to the housing ladder for many. The primary loan will still be assessed under traditional criteria. The research also showed that the same change in forecasting for the primary loan could vary maximum lending amounts between the most and least efficient homes by up to £11,500, which could also release thousands of pounds for those undertaking energy refurbishments on older properties.
The LENDERS project included the analysis of 40,000 sets of property data, and was undertaken by a consortium of partners: Arup, BRE, Constructing Excellence Wales, the Energy Saving Trust, Nationwide Building Society, Principality Building Society, UCL Energy Institute and the UK Green Building Council. The new mortgage calculations will come into effect in Wales from next month.
Rebecca Evans, Wales Minister for Housing and Regeneration, said:
“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.
“We hope to see lenders follow our lead and making energy efficiency part of the mortgage consideration for all homebuyers in Wales.”
Andrew Sutton, Associate Director, BRE Wales, comments, “This announcement is a great step for the LENDERS project outcomes and fantastic news for first-time buyers in Wales. The more accurate forecasting provided by the research will help many onto the housing ladder who might have struggled to obtain a mortgage previously, and the research we will do in parallel with the adoption should help other financial institutions better understand the practicality of implementing.
“I am delighted to see the LENDERS project translated from research into reality and I hope to see other mortgage lenders follow suit.”
Notes to Editors
What properties will qualify for LENDERS Help-To-Buy loans in Wales?
The more accurate view of expenditure will be used to calculate Help-To-Buy top-up loans, which are available almost exclusively on new build properties. Converted commercial buildings into new homes may also qualify.
Who are the LENDERS partners?
Nationwide Building Society; BRE; Principality Building Society; UK Green Building Council (UK-GBC); Constructing Excellence in Wales (CEW); Energy Saving Trust (EST); Arup; University College London Energy Institute (UCL). (The Zero Carbon Hub were also partners before ceasing trading in 2016)
How did the project come about?
The LENDERS project builds on a concept from BRE in 2010 initially developed by CEW & BRE and parallel research from 2014 by UCL & UKGBC, all of which that suggested a link between a property’s energy efficiency and actual fuel costs.
Who is funding the project?
The Government’s innovation agency Innovate UK are part-funding the LENDERS project, with the project partners themselves investing up to 55% of their time and effort at their own cost.
Why do the research?
The legal requirement for the availability of EPC data at the point of sale means homebuyers can make judgements on the energy performance of their purchase, but are only likely to do so in any numbers if there are suitable incentives. The research seeks to provide one such incentive by providing a method to capture differences in likely fuel bills.
What data was used?
The project looked to acquire multiple datasets, but the core findings are based on a 40,000 dataset of individual homes. This compares to the current information on fuel costs data which comes from approximately 4,900 homes.
What calculation was done?
The core element of the project has produced a fuel forecasting tool that uses inputs likely to be known when a house search is underway (but before the final house is picked) to estimate the future fuel costs for that household. The tool can be found at www.epcmortgage.org.uk
What are the impacts if adopted?
The range of fuel costs between “A” rated properties and “G” rated properties, if factored into an affordability calculation, could vary the maximum mortgage amount that could be borrowed by £11,500 where all other lending factors are the same – i.e. the same household could borrow £11,500 more against an “A” rated property than against a “G” rated one.
In many cases, finding houses at both extremes of the EPC range won’t occur. The variation in maximum mortgage offer for two EPC bands (such as “E” to “C”) would be likely to be in the region of £4,000.
Most people don’t borrow to their limit, so isn’t changing this irrelevant?
Only a minority of homebuyers borrow to their limit, and would therefore directly benefit from any change being implemented. However, if implemented as suggested in the research, all future borrowers would become aware of the greater funds available for low energy homes, and it is believed this awareness will have a significant impact on behaviours.
Isn’t this going to create a big problem for those who own poor performing homes?
No; the project suggests that the same change in the affordability calculation should enable lenders a mechanism to reflect that homeowners who wish to undertake energy performance improvements should get lower bills. This would then demonstrate an increased capacity to make repayments on additional secured borrowing that could release capital funds to help pay for the energy performance improvements, creating a virtuous circle. The project does acknowledge that lenders’ commercial product offerings will need to consider at what point loans should be paid and what evidence is appropriate.
What might the long-term effects be if it were to be adopted?
The project hopes that offering those searching for a home the potential of more money if they buy a lower energy home will shift buying habits towards lower energy homes. In turn, lower energy homes could see faster sales turnarounds then potentially a modest price premium. These changes could likely influence those renovating or selling homes to consider how they can maximise their sales price, and the potential to source additional borrowing against such energy performance work provides them access to funds.
So, when will the change happen?
Changing the underlying mortgage affordability calculation that underpins at least £127bn of lending in the UK each year is not likely happen overnight. However, the first step is to make the forecasting tool available to homebuyers as informal guidance initially, which the project has done through its website lenders are encouraged to follow suit, with more detailed assessment of how to adapt affordability calculation likely to come in the following few years.