Mortgage lenders could be penalising buyers of modern, energy efficient homes by undervaluing their properties by as much as £45,000, new research has found.
Research by the UK Green Building Council (UKGBC) and the UCL Energy Institute at University College London has found banks, building societies and other mortgage providers are failing to make accurate estimates of household energy bills in the affordability checks that underpin their mortgage calculations.
The study finds mortgage lenders could “significantly improve” on estimated energy costs currently used in their mortgage affordability calculations if they used readily available data including, for example, the Energy Performance Certificate (EPC) rating of the property.
According to modelling from UKGBC and UCL, lenders’ current approach for estimating energy costs can be inaccurate by as much as £45,000 over the course of a 25-year mortgage for a relatively efficient modern home. The difference for a typical Victorian property was found to be nearly £11,500.
The report says that if lenders were to take a slightly more sophisticated approach that accounted for key property characteristics, these estimates could be much more accurate. This would reduce lenders’ risk as they would be better able to tailor their lending to reflect the true costs of occupation of properties. Efficient properties could then rise in value relative to their inefficient peers, as the former would be in a position to attract more mortgage finance than the latter.
Richard Griffiths, senior policy advisor at UKGBC, who co-authored the study, said: “If banks took some quite straightforward steps to address this – by including data on properties’ energy efficiency and making more accurate estimates of their likely energy bills – they would reduce the risks associated with their lending, while helping to create the conditions that would see energy efficient properties rise in value compared to their inefficient counterparts.
“One important consequence of that is that would-be purchasers would be incentivised to buy efficient properties, and existing homeowners would see the value of their homes increase if they took steps to retrofit them. In the context of government having recently cut support for the Green Deal in the face of low demand, this could be an important development for the industry and policymakers.”
The report, The role of energy bill modelling in mortgage affordability calculations, is available on the UCL website.