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In October 2021, the government published its Heat and Buildings Strategy (Strategy). Decarbonising energy used in buildings forms a key part of the government’s Clean Growth Strategy and underpins the Prime Minister's Ten Point Plan for a Green Industrial Revolution. This requires improvements to the energy efficiency of buildings, changes to the way we heat and cool our buildings and improving the performance of energy-related products.
The Strategy brings together the government's work on energy efficiency and clean heat. It seeks to ensure that the UK has a consistent and coherent approach across different markets, buildings and occupancy types and a credible pathway to achieving Net Zero targets.
In this column, I consider the key aspects of the Strategy for the mortgage market and some of the key questions that lenders should consider in preparing for what comes next.
For information on the Strategy, see Legal update, Government publishes Heat and Buildings package including long-awaited Strategy.
There are several aspects of the Strategy that will be of particular interest to the mortgage market:
Understandably, when the Strategy was launched it was the risk of "energy-efficiency mortgage prisoners" and potential financial exclusion that dominated the headlines across the mainstream and trade press.
It is clear from the Strategy that there are considerable hurdles to overcome particularly to boost the financing of energy efficient retrofits in the UK and that there is no one-size-fits-all solution to the decarbonisation of buildings.
In particular, there are a number of risks that financial institutions would need to consider and manage if some of the measures where introduced, including ensuring that both:
However, these risks and challenges are not insurmountable. The Strategy provides a starting point, but what is clear is a more complete and co-ordinated plan is needed between government, regulators and industry to achieve the ultimate goal of upgrading all UK property to an EPC rating of C.
We are already seeing significant growth in supply of green mortgage products across the residential and buy-to-let mortgage market. Yet, although homeowners in the UK who are looking for a green mortgage have more options than ever before, to-date one of the key challenges to growth and development has been consumer demand.
One of the ways the Strategy seeks to address this is through a combination of government support for advice to homeowners on how they can improve their building's energy efficiency (for example, through the Simple Energy Advice online platform) and introduction of minimum property standards.
In addition to the measures set out in the Strategy, there are other potential steps that could be considered to help accelerate green innovation in the mortgage market (as recognised by the Climate Financial Risk Forum). These include:
It is clear that the government considers that mortgage lenders have a key role to play in its strategy to decarbonise buildings. It is important that the industry to continue to engage with the government on the Strategy and its implementation to ensure that introduction of legislative, regulatory and policy standards align with product availability and market conditions and to mitigate some of the risks outlined above.
I expect the development of financial products to support improvements to the energy efficiency of buildings to continue to be a key trend in the mortgage market over the short to medium term.
03 November 2021
Insights 20 JANUARY 2022