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What Are Green Mortgages?

Welcome to the world of green mortgages! In this comprehensive guide, we will explore the principles of green mortgages, their potential to revolutionize energy efficiency within homes, the barriers they face, and the support they receive from banks and mortgage lenders. We will also delve into the influential role played by Green Building Councils in promoting green mortgages. So, let's dive in and discover how green mortgages can contribute to a more sustainable future.


Table of Contents

  1. What is a Green Mortgage?

    • Defining a Green Mortgage

    • Incentives for Borrowers

  2. The 'Green' in Green Mortgages

    • Reducing Risk for Lenders

    • The Value of Green Buildings

  3. Revolutionizing Energy Efficiency

    • The Urgent Need for Building Renovation

    • Unlocking Finance for Renovation

  4. Overcoming Barriers

    • Technical and Social Challenges

    • The Importance of Marketing

  5. Support from Banks and Lenders

    • Mixed Picture of Support

    • Capital Treatment of Green Mortgage Debt

  6. The Role of Green Building Councils

    • Defining and Assessing Performance

    • Roundtables and Recommendations

  7. Availability for House Buyers

    • Pilot Phase and Early Adopters

    • Potential for Mass Market Penetration

  8. European Green Building Councils Involved

    • National Partners in the EeMAP Project

    • Learn More about the Europe Regional Network


1. What is a Green Mortgage?

Defining a Green Mortgage

A green mortgage is a unique type of mortgage that offers preferential terms to house buyers who can demonstrate that the property meets specific environmental standards. This could include newly built homes with sustainability ratings or existing buildings that borrowers commit to renovating for improved environmental performance. In essence, a green mortgage is designed specifically for green buildings.

Incentives for Borrowers

The primary incentive for borrowers to choose a green mortgage is the opportunity to enjoy either a lower interest rate or an increased loan amount. By encouraging borrowers to invest in green buildings or renovate existing ones to make them greener, banks and mortgage lenders aim to support sustainable practices and promote energy efficiency.

The concept of green mortgages gained traction during the BUILD UPON project, which focused on renovating existing buildings in Europe. The European Mortgage Federation (EMF), in collaboration with RICS, regional partner E.ON, and leading universities, received EU funding to develop a roadmap for European green mortgages under the EeMAP initiative[^1^].

2. The 'Green' in Green Mortgages

Reducing Risk for Lenders

In the context of the EeMAP project, defining 'green' in green mortgages aligns with the underlying business case for lenders. For banks, offering green mortgages is a way to mitigate risk. Research suggests that green buildings and their occupants represent a lower risk investment for banks for two main reasons:

  1. Decreased utility bills: Green buildings generally have lower operational costs, resulting in reduced utility bills. This financial advantage allows borrowers to be in a better position to repay their loans, thereby lowering the probability of default.

  2. Increased value and resilience: Green buildings are believed to have increased value, often referred to as 'green value', compared to equivalent properties without green credentials. Additionally, they are more resilient to market fluctuations where less green properties may become less attractive. Over time, these two effects are expected to grow, making green buildings an appealing choice for lenders[^1^].

By maximizing green value and avoiding future discounts associated with less sustainable buildings, lenders can reduce the risks associated with their loans. This improved loan-to-value ratio could also justify lending larger amounts to green buildings compared to non-green ones.

3. Revolutionizing Energy Efficiency

The Urgent Need for Building Renovation

Buildings are significant energy consumers, with the majority of the buildings we will be using in 2050 already constructed in Europe. To meet the climate change targets set out in the Paris Agreement, there is an urgent need to increase the rate of energy-efficient building renovation from 1 to 3 percent per year[^1^].

Unlocking Finance for Renovation

Green mortgages play a crucial role in unlocking additional finance for building renovation from the private sector. By involving mortgage banks, green mortgages bring a new group of stakeholders into the campaign for green buildings. This increased focus on energy efficiency and sustainability at an early stage of a building's life, when decisions about property renovations are typically made, can have a significant impact.

Research conducted by the Energy Saving Trust in the UK indicates that major renovations are often carried out within the first year of ownership[^1^]. Therefore, offering green mortgages can put energy efficiency at the forefront of building owners' minds during this critical decision-making period.

4. Overcoming Barriers

Technical and Social Challenges

Despite the potential benefits of green mortgages, several technical and social barriers need to be overcome for them to become commonplace. One of the challenges highlighted in a report by the UK Green Building Council is that current mortgage affordability calculations in the UK do not consider energy performance[^1^]. To encourage greater adoption of green mortgages, banks need to develop a deeper understanding of green buildings and collect sufficient data to prove that green properties indeed pose lower risks.

From the borrower's perspective, focusing solely on the business case may not be enough to drive investment in energy efficiency measures. Despite the promising financial payback of such measures, many homeowners are not willing to make the necessary investments. To address this issue, a better marketing strategy is required to make green renovations as common and attractive as other home improvements, such as extensions or new kitchens[^1^].

The Importance of Marketing

To overcome the marketing challenge, E.ON, one of Europe's leading green utilities and a regional partner in the EeMAP project, is conducting customer insight research. The aim is to identify effective strategies for promoting green renovations and making them more appealing to homeowners. By creating awareness and highlighting the long-term benefits of energy-efficient upgrades, a stronger case can be made for green mortgages and their role in improving sustainability[^1^].

5. Support from Banks and Lenders

Mixed Picture of Support

While green mortgages already exist in some countries, the level of support from banks and lenders varies. The EMF's finance workstream under the EeMAP initiative has engaged around 20 leading banks and financial institutions. However, many lenders are waiting to see if financial regulators will improve the 'capital treatment' of green mortgage debt. This improvement would allow banks to lend more overall by demonstrating that the mortgage debt they hold carries lower risks[^1^].

Capital Treatment of Green Mortgage Debt

The concept of capital treatment revolves around the idea that banks can justify lending more if they can prove that their mortgage debt associated with green buildings carries lower risks. By assigning a lower risk profile, banks can offer larger loans and contribute to the growth of the green mortgage market. Financial regulators play a crucial role in determining the capital treatment of green mortgage debt, which can incentivize lenders to support sustainable initiatives[^1^].

6. The Role of Green Building Councils

Defining and Assessing Performance

The Europe Regional Network of Green Building Councils, led by WorldGBC, plays an influential role in the EeMAP project. Green Building Councils (GBCs) are working together to define and assess energy and environmental performance in the context of green mortgages at a European level[^1^]. GBCs have conducted detailed analyses of green mortgages in their respective markets and are collaborating to develop initial recommendations for a Europe-wide product.

Roundtables and Recommendations

To refine their recommendations, GBCs are hosting roundtable discussions with experts in the field. These roundtables, scheduled for early 2018, will provide an opportunity to stress-test the initial recommendations and gather valuable insights. The recommendations that emerge from this collaborative process will serve as a starting point for a pilot phase involving banks, which is set to commence in summer 2018[^1^]. This pilot phase aims to generate the data needed to prove the lower risk profile of green loans, a crucial step towards establishing a mass market for green mortgages.

7. Availability for House Buyers

Pilot Phase and Early Adopters

While some green mortgages are already available, the pilot phase of the EeMAP project, starting in summer 2018, is expected to increase availability. The success of this phase, which aims to establish a link between green performance and financial performance, will likely encourage more consumers across Europe to consider greening their homes alongside other home improvements[^1^]. However, as with any transition, there may be a significant time gap between early adopters and widespread market penetration.

Potential for Mass Market Penetration

Once green mortgages gain momentum, their potential to revolutionize energy efficiency within homes is significant. By incentivizing energy-efficient building renovations and making them financially attractive, green mortgages can contribute to meeting climate change targets and promoting sustainable practices. While mass market penetration may take time, the long-term benefits for both homeowners and the environment are substantial[^1^].

8. European Green Building Councils Involved

Several national Green Building Councils are actively involved in the EeMAP project as national partners. These organizations are committed to driving the development and implementation of green mortgages in their respective countries. The national partners in the EeMAP project include:

  • Croatia GBC

  • DGNB (Germany)

  • Dutch GBC

  • Finland GBC

  • France GBC Association HQE

  • GBC Espana

  • GBC Italia

  • Irish GBC

  • Polish GBC

  • UK-GBC[^1^]


Green mortgages have the potential to revolutionize the way we approach energy efficiency in buildings. By offering preferential terms to borrowers who invest in green buildings or renovate existing ones, green mortgages incentivize sustainable practices and contribute to meeting climate change targets. While there are challenges to overcome, the support from banks, lenders, and Green Building Councils demonstrates the growing interest in promoting green mortgages. As these mortgages become more widely available, we can expect a shift towards a more sustainable future, one green building at a time.

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