Green mortgages are increasingly popular, but do they work?

Green mortgages – where borrowers get preferential rates if their home meets a Building Energy Rating (BER) of A1 to B3 – are becoming increasingly common. But are they actually having an impact on climate change?

Going green

Getting a mortgage isn't an easy job for the most part, so no one would want additional hoops to jump through. Luckily, green mortgage rules are similar to those for a regular mortgage, except that the borrower has to meet the additional BER requirement. Conor Holland, director, ESG, KPMG in Ireland explains. "In most cases, to qualify for a green mortgage, you need to be buying a home with a Building Energy Rating (BER) of at least B3 or higher. In effect, consumers can get a discount on the interest rate applied to traditional mortgage products by 'going green'."

Why do lenders offer green mortgages?

As about 10 per cent of Ireland's carbon emissions come from homes, green mortgages can help combat climate change through a demand for more better-built, energy-saving homes that are easier to heat and keep warm. Paul Travers, head of energy, climate action, and infrastructure at AIB, says they offer green mortgages to encourage customers "to buy more energy-efficient homes or upgrade their properties through retrofitting, to avail of better lending rates". These mortgages are available to customers who are buying, building, or retrofitting an A1-B3 BER-rated property to live in.

Similarly, Bank of Ireland offers green mortgages and loans to support climate change initiatives. Alan Hartley, director of home buying at Bank of Ireland, says:

“The Government’s Climate Action Plan has set out a target of upgrading 500,000 older homes to a BER rating of B2 by 2030 and of installing 400,000 heat pumps. Since its introduction in 2019, our Green Home Improvement loan has provided a rate discount for customers to fund energy-efficiency retrofits for older properties.”

Where did green mortgages arise from?

The European Commission’s Green Deal has been instrumental in the creation of green mortgages.

Mark Kennedy, managing partner of Mazars, says: "The deal is a plan to save the European economy over the next 20 years and it's got very hard targets set even in the short term to 2030.

"There's a strong economic strand to the deal. It's trying to push all sorts of sectors to be more sustainable and finance is inevitably front and centre, and that is guiding both European Central Bank policies and the availability of funding for different EU structures, directly or indirectly, where the various schemes that will either support industries or can be drawn on as guarantees."

The Green Deal is having an impact on the cost of money to support green projects of all sorts – and mortgages are a subset of that. The savings from a bank perspective are passed on to the customers through the reduced interest rates.

Hartley outlines how the financial sector is also playing its part. “This involves providing sustainable finance – through core financing and advisory capabilities, enabling customers to transition to net zero and develop and deploy low-carbon technologies.”

Scaling up

Speaking about whether green mortgages are sustainable long-term, Kennedy says: “In any initiative that you have of this nature where you’re dealing with consumers, volume is key. In the world of finance, particularly in the Irish market, there are not too many financial products that have the same sort of volume as mortgages in the long run.

“Almost everybody will buy a house at some point in their life, or they’ll live in a house that has been bought by somebody and the funding of that, therefore is a volume product. It’s clearly a mass-market product and has a lot of impact as a consequence. That’s why it’s important.”

Benefits to the borrower

Beyond the obvious savings with a lower interest rate mortgage, borrowers will find multiple other benefits, Holland says. “Green mortgages are both financially and environmentally compelling. Aside from the attractive interest rate, they facilitate an easier transition for consumers to a more energy-efficient home, or to renovate their existing residence.

“In effect, borrowers can save money on their mortgage, as well as their heating and electricity bills if they choose a sustainable, energy-efficient home. It provides a practical solution for customers looking for options to make their homes energy efficient.”

Travers agrees, saying the savings can be significant. “For example, a two-bed A-rated apartment has an estimated annual fuel bill of €280 compared with €3,000 for a G-rated apartment (Sustainable Energy Authority of Ireland, March 2021), with the obvious impact on carbon emissions.”

Long-term impact on climate change

There is a clear customer appetite for these products, says Kennedy. In terms of their impact on climate change, the results still remain to be seen, he says. “We are still at an early stage of all of these initiatives.

“In terms of the carbon footprint savings in reduction that’s necessarily prospective from here. I would personally say the impact is positive because it’s a mass-market product and it’s going to directly address one of the main issues in climate change, which is the construction sector and the sustainability of the houses we live in.”

Hartley agrees. “Yes, these products are making a difference, because they are helping to change consumer behaviour. There has been a mass shift in public awareness and behaviour on sustainability.”