Could low-rate energy efficient mortgages inspire a European renovation revolution?
So, here is a mortgage discussion with your friendly bank manager from the future.
Would-be homeowner (WH): “I want to borrow lots of money to buy a home.”
Friendly bank manager from the future (FBMFF): “OK. Well, we can offer you lots of money at our normal mortgage rate, but if you buy a home that’s energy efficient — or if you renovate a place and make it more energy efficient — the rate is lower.”
WH: “That sounds great. But I don’t understand, why the lower rate?”
FBMFF: “Because we understand that more energy efficient homes in Europe are good for the environment and society — buildings are responsible for 36% of emissions as well as 40% of EU energy consumption and 54 million Europeans live in fuel poverty. Energy efficient homes are good for banks too.”
WH: “So, how can you give me a lower rate mortgage if I buy an energy efficient home or create one through renovation?”
FBMFF: “Well, we’ve crunched the numbers and found that investing the bank’s money in energy efficient homes is good business. In fact, it’s so good that if you invest in renovations that improve the energy efficiency of your home we’ll give you even more money at a cheaper rate than a traditional loan.”
WH: “Right, where do I sign?”
It sounds too good to be true. So, could this scenario simply be a banker’s daydream?
“Absolutely not,” says Luca Bertalot, Secretary General of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC). “Standardised energy efficient mortgages based on preferential interest rates for energy efficient homes and renovations resulting in improved energy efficiency are the shape of things to come.”
And to prove it, the EMF-ECBC has brought together a consortium of businesses, building companies, energy providers and valuers to create a two-year pilot scheme for what is being called the European Energy Efficiency Mortgage initiative.
Partners include Ca’Foscari University of Venice, the Royal Institute of Chartered Surveyors, the European Regional Network of Green Building Councils, E.ON and SAFE Goethe University Frankfurt as well as 13 major European banks such as BNP Paribas SA, HSBC Holdings Plc and ABN AMBRO Bank NV.
“This is the first time private money has considered the possibilities of energy efficiency mortgages,” says Bertalot. “The world has changed in recent years and private sector investment opportunities in the green sector are a growing trend.”
Indeed. Following the Paris climate conference last year, 187 countries committed to on-going emissions reductions to keep warming below 2oC. In Europe, the EU has set a 20% energy savings target by 2020 and is considering increasing this percentage by 2030.
To achieve these targets is going to take money. Lots of money. The International Energy Agency has said that two-thirds of Europe’s low carbon energy infrastructure to 2040 needs to be in energy efficiency to achieve Europe’s pledge to keep global warming below 2oC. That means an average of €178 billion every year to keep the EU on track.
So, it’s a great time to find new financial incentives to stop emissions from buildings and cut their energy use. “In Europe it is not so much about new buildings it’s about old ones. By 2050 at least 70% of the European Union’s building stock will still be with us,” says Bertalot. “So we need to unlock the money needed to renovate these buildings.”
But where is that money going to come from? Policy makers usually understand the benefits of renovation, but often moan that they don’t have the deep pockets needed to implement a Europe-wide renovation revolution.
“Energy Efficiency Mortgages are a win-win for everyone,” says Bertalot. “The demand is there. It is a natural human desire to want to have your own home and to improve it, particularly if that cuts your energy bills and helps protect the environment. I also believe it is very human to want to increase the value of your home, particularly in an economic climate where financial planning for retirement is increasingly challenging. Low mortgages obviously help to make all these things more possible.”
So, what’s in it for the banks? First, energy efficient homes are worth more than inefficient homes. If everything goes wrong and the mortgage cannot be paid, the bank gets back a more valuable asset than before. Secondly, says Bertalot, most mortgage defaults occur in the first two years of the mortgage — a risk that would be reduced further by putting more disposable income in mortgage payers’ pockets as a result of lower energy bills. And finally, research in the US has shown that the owners of energy-efficient homes are 32% less likely to default on mortgages anyway.
“Banks hate a high probability of mortgage default and they hate assets that lose value. They want a portfolio of lending that’s reliable and low risk, and if they generate green bonds they also pay a little less in funding costs,” says Bertalot. “For investors there are financial incentives associated with sustainable investments as well as an increasing appetite for green initiatives.”
In a new green mortgage world, the homeowner has an energy efficient home courtesy of one of Europe’s 8,300 banking companies, investors are happy, millions of new jobs are created renovating homes, Europe’s energy use is cut, carbon emissions are reduced and everyone lives happily ever after without having to rely on a cent of public money.
Not quite. Although promising, the European Energy Efficiency Mortgage is still in the pilot stage. There is a lot of work to be done. At the crux of the initiative is creating transparent definitions of a green home and ensuring the mechanisms, certifications and technology involved in valuing an energy efficient home and any renovations can be assessed accurately, transparently and, of course, reliably. There can be no ‘greenwashing’ simply to access cash, says Bertalot.
“We are working on this initiative brick by brick. We are creating a road map putting numbers into data models to see where we are going; we are identifying market best practices and we are working with stakeholders to create the valuation mechanism. We need a robust model. We need to plan for the mortgage market in 20 years’ time and we have to design a sustainable environment for the future.”