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Two seemingly perennial challenges concerning the UK are; the urgent need (and legal obligation) to reduce the country’s carbon emissions by 80 per cent by 2050; and the supply and affordability of homes.
Part of the work we do at the British Research Establishment (BRE) is trying to come up with solutions and we think we may have found one that combats both issues at the same time.
The underlying principle is simple – low energy homes have lower fuel bills. However, current mortgage affordability assessments have no way of predicting fuel costs for future homeowners. Mortgage lenders instead rely on national average energy costs when assessing the home-buyer’s ability to meet mortgage repayments.
The current situation means that those in low energy homes are having their fuel costs over-estimated, and worryingly, those in ‘high energy’ homes may struggle to meet monthly mortgage payments due to higher energy bills than those assumed in their mortgage affordability tests.
There’s clearly a great opportunity to make mortgage lending more accurate while incentivizing potential homeowners to choose lower carbon homes; it’s a win-win scenario.
This led to the Lenders project, which won part-funding from Innovate UK (a government funding body) to undertake more detailed research with a team of collaborators to provide evidence for this theory. The project’s final report was recently launched by Claire Perry MP, Minister for Climate Change and Industry.
Using a database of approximately 40,000 homes, the project demonstrated that it is possible to more accurately forecast homeowners’ energy bills using a combination of number of occupants, bedrooms and Energy Performance Certificate (EPC) rating – the latter is a legal requirement for all homes for sale or rent in the UK.
This is intended to encourage prudent mortgage lending, but the Lenders method has further-reaching consequences. More accurate energy bill forecasts could increase maximum mortgage offers by approximately £11,500 for buyers of low energy homes, or reduce them by the same amount for buyers of high energy homes.
So, the project could actually influence home-buyer choices. Maximum mortgage offers can be dependent on the final property’s EPC rating. So homebuyers wishing to borrow more are then nudged towards low energy homes, where they can better afford mortgage repayments due to the lower fuel bills. While this isn’t directly saying low energy homes are worth more, it’s only a short market-led step away from that outcome.
The Lenders project represents just one of many initiatives that will be needed to push the UK towards a low carbon economy. The onus now is on the mortgage and housebuilding industries, or government legislation, to drive adoption of better energy forecasting practices and integrate them into the homebuying process. We believe that making this model of energy-efficient lending universal would be hugely beneficial all-round.
By City A.M.
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