- Leading experts in home energy and financial services analysed data for 40,000 properties
- Fuel efficiency and fuel bills link has generated new calculator for consumers
- More accurate energy expenditure estimates could vary maximum loans by up to £11,500
More accurate assessment of home energy bills by lenders could vary maximum mortgages by up to £11,500 between the most efficient properties and the most energy hungry homes, according to a new report published today.
Part-funded by Innovate UK and involving a consortium of industry experts, 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 project successfully demonstrated and modelled the link between energy efficiency and household fuel bills. As a result, the team was able to create a new consumer calculator www.epcmortgage.org.uk to demonstrate the cost benefits of fuel efficiency, enabling would-be buyers to see the benefits of energy efficiency homes.
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.
In the longer term, if this more accurate view of expenditure was used in lender affordability calculations, it could be reflected by increased mortgage lending to those with the most efficient properties. The report also suggests that the same change in forecasting could release thousands of pounds for those undertaking energy refurbishments.
Andrew Sutton, Associate Director, BRE, said:
“Our research indicates that low energy homes potentially enable homebuyers to borrow more than those buying poor performing homes. Put simply, energy efficiency brings smaller energy bills, which if captured when calculating mortgage affordability could allow buyers to take out a larger loan.”
Henry Jordan, Director of Mortgages at Nationwide Building Society said:
“The LENDERS project has developed a valuable tool that could help customers forecast their future home’s energy costs. The work highlights the impact of home efficiency on fuel costs and presents a potential opportunity for lenders to support customer’s home and environmental ambitions and to improve the UKs energy performance.”
Claire Perry, MP, Minister for Climate Change and Industry, said:
“This government is committed to making home ownership affordable for all. More accurate estimates of household energy costs could improve lending practices, lead to new sources of finance and increase energy efficiency across the country. That’s why government funded this project through Innovate UK and looks forward to seeing the industry take action in response.”
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Notes to Editors
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.