A relatively recent feature of the home loan market is the green mortgage, which offers homebuyers a discounted rate for more environmentally-friendly properties. In the main, this means that borrowers can avail of a cheaper mortgage rate if they are buying a house with an energy rating of BER B3 or better.
Existing homeowners who invest in an energy retrofit project to bring their homes up to that standard can also switch to a green mortgage if the sums add up for them.
"The chief benefit for consumers is the lower rate," says KPMG director Conor Holland. "The banks have made commitments around decarbonising their earnings. They are coming under regulatory pressure from the ECB and others to decarbonise their loan books. Also, from a risk view there is a bigger risk to collateral secured against a loan from houses which are vulnerable to climate change in any way."
Of course, banks are also motivated by their own ESG agendas. "In line with our commitment to ensuring a climate-resilient business model, AIB is determined to provide customers with products and services that address environmental challenges as we seek to play our part in helping the Irish Government and the European Union to meet their carbon reduction targets," says Mary Whitelaw, director of corporate affairs, strategy and sustainability at AIB.
“Recognising that about 10 per cent of Ireland’s carbon emissions come from homes, AIB is actively encouraging customers by offering them discounted green mortgages to buy more energy-efficient homes,” she adds.
“The green mortgage has already proved very attractive to customers seeking warmer homes that cost less to heat, lower monthly mortgage repayments, and the knowledge that they are playing their part in Ireland’s efforts to tackle climate change,” Whitelaw continues. “We are Ireland’s largest financier of energy-efficient homes, lending €1.3 billion in 2021, and in 2021 green mortgage products represented 23 per cent of new mortgage lending.”
Standards
According to Johnny Mattimore, a member of the Irish Funds Industry Association’s ESG servicing data working group and managing director, global head of risk and sustainable finance with First Derivative, there are no real standards in existence as yet for green mortgage products.
“They are generally linked to something like the BER rating of a home but there is no standard to say if a property is green or if a mortgage is green,” he says. “It is quite idiosyncratic, but the market is trending towards a more uniform approach.”
There can also be variants of the standard green mortgage to suit different circumstances. For example, with vast numbers of existing homes and commercial buildings earmarked for green retrofitting, the finance has got to come from somewhere.
People purchasing those properties could be offered green loans with strings. The initial rate might be the same as for a standard mortgage, but the lower rate would kick in as soon as the retrofitting work has been completed.
This would have other advantages in terms of loan-to-value rations, according to Mattimore. “The lender might also advance a home-improvement loan on top of the mortgage in order to bring the property up to standard,” says Mattimore.
But the question remains, how do these products work? Why should a loan for one type of property be any cheaper than another if all other things are equal?
But, according to Mattimore, there is no difference in the cost of capital to the banks. “Under current rules there is no difference between a green and non-green house,” he points out. “But the banks are anticipating change at the next Basel iteration. You are going to see a difference in the risk weightings allocated to assets. Classic risk pricing will mean that higher risk assets will have less capital assigned to them.”
Securitisation
But that lies in the future. What about the present? At least part of that may come down to the way the lenders raise capital. Part of that is by securitising loan books, or portions of them. That works by selling the income stream from the asset for a particular period.
But Mattimore explains that securitisation of such assets may not be viable unless they are made up of green mortgages. This is due to the fact that the only buyers in the market for such products are investment funds, and the whole funds industry has either gone green or is going green.
And then, of course, there is the value of the homes themselves. In a self-reinforcing cycle, the very availability of green mortgages will have the effect of driving up the value of qualifying homes which meet the necessary energy rating standards. The natural corollary is that the value of non-qualifying homes will be depressed. This will naturally lower the long-term lending risk associated with green mortgages, thereby justifying the discounted rate.
Finally, we have to ask if a green mortgage is really worthwhile for borrowers. After all, if the cost of the home is going to be that much higher might it not be more affordable to opt for the cheaper non-green alternative, even at the higher mortgage rate?
However, the savings on offer from green mortgages can be quite attractive. According to comparison website Bonkers.ie, the difference between a five-year fixed rate of 3 per cent on a standard 30-year €250,000 mortgage and a 2.7 per cent discounted fixed rate on a green mortgage adds up to €2,400 over the five-year term. And with green mortgages available from all the main home loan providers in Ireland, that’s certainly worth thinking about.
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