Mortgages - a change is coming

New research backed by CEW and delivered as part of the LENDERS REPORT argues that a change in the way mortgages are calculated might allow homebuyers to access more money, but also change attitudes towards energy performance.

New research backed by CEW and delivered as part of the LENDERS REPORT argues that a change in the way mortgages are calculated might allow homebuyers to access more money, but also change attitudes towards energy performance.

Homebuyers have potential to borrow more with better, more accurate forecasting of energy bills, if the findings in research from the LENDERS project is applied.

That was the headline at the launch in Westminster on 18th July and this was echoed in a piece by the Guardian’s Adam Vaughan published on the same day.

There is more to the research and the findings than that.

The LENDERS report recommends a change in the way mortgages are calculated and could improve loans to homebuyers by up to £11,500. The project included the analysis of 40,000 sets of property data, and was undertaken by a consortium of partners: Arup, BRE, Constructing Excellence in Wales, the Energy Saving Trust, Nationwide Building Society, Principality Building Society, UCL Energy Institute and the UK Green Building Council.

The work was part-funded by Innovate UK and involving a consortium of industry experts, the LENDERS project set out to demonstrate that improved analysis of the likely household energy costs could improve mortgage affordability assessments and potentially allow mortgage borrowers to access a larger home loan. The project itself project builds on a concept from BRE in 2010 initially developed by CEW (Constructing Excellence in Wales) & BRE and parallel research from 2014 by UCL & UKGBC, all of which that suggested a link between a property's energy efficiency and actual fuel costs.

The research was taken forward – once funding via Innovate UK and support from Nationwide and Principality was secured – to see what incentives might encourage homebuyers to look closer at the energy performance of their homes. The legal requirement for the availability of EPC data at the point of sale means homebuyers can make judgements on the energy performance of their purchase, but are only likely to do so in any numbers if there are suitable incentives. The research seeks to provide one such incentive by providing a method to capture differences in likely fuel bills.

The project successfully demonstrated and modelled the link between energy efficiency and household fuel bills. As a result, the team could create a new consumer calculator to demonstrate the cost benefits of fuel efficiency, enabling would-be buyers to see the benefits of energy efficiency homes.

In the longer term, if this more accurate view of expenditure was used in lender affordability calculations, it could be reflected by increased mortgage lending to those with the most efficient properties. The report also suggests that the same change in forecasting could release thousands of pounds for those undertaking energy refurbishments.

Andrew Sutton, Associate Director, BRE, said: “Our research indicates that low energy homes potentially enable homebuyers to borrow more than those buying poor performing homes. Put simply, energy efficiency brings smaller energy bills, which if captured when calculating mortgage affordability could allow buyers to take out a larger loan.”

Henry Jordan, Director of Mortgages at Nationwide Building Society said:

The UK Government is fully supportive of the project and Claire Perry, MP, Minster for Climate Change and Industry, attended the launch and said: 

“This government is committed to making home ownership affordable for all. More accurate estimates of household energy costs could improve lending practices, lead to new sources of finance and increase energy efficiency across the country. That's why government funded this project through Innovate UK and looks forward to seeing the industry take action in response.”

Some critics have argued that the change in mortgage calculation is going to create a big problem for those who own poor performing homes. The answer is no. The project suggests that the same change in the affordability calculation should enable lenders a mechanism to reflect that homeowners who wish to undertake energy performance improvements should get lower bills. This would then demonstrate an increased capacity to make repayments on additional secured borrowing that could release capital funds to help pay for the energy performance improvements, creating a virtuous circle. The project does acknowledge that lenders’ commercial product offerings will need to consider at what point loans should be paid and what evidence is appropriate.

The project hopes that offering those searching for a home the potential of more money if they buy a lower energy home will shift buying habits towards lower energy homes. In turn, lower energy homes could see faster sales turnarounds then potentially a modest price premium. These changes could likely influence those renovating or selling homes to consider how they can maximise their sales price, and the potential to source additional borrowing against such energy performance work provides them access to funds.

So, when will the change happen? Changing the underlying mortgage affordability calculation that underpins at least £127bn of lending in the UK each year is not likely happen overnight. However, the first step is to make the forecasting tool available to homebuyers as informal guidance initially, which the project has done through its website lenders are encouraged to follow suit, with more detailed assessment of how to adapt affordability calculation likely to come in the following few years.

The LENDERS report is the first step – albeit the route to this point has taken considerable effort by the team led by Andrew Sutton. The LENDERS team now needs to cajole and influence Government as well as the mortgage providers to make the assessment needed to drive the changes recommended. CEW needs to have similar conversations in Wales. The project will also, in time, come to have an impact on the wider changes needed to improve the whole process of designing, planning and building and then buying a home in the UK.

Watch this space.