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Beyond Brick and Mortar: The Future of European Housing through Green Mortgages

For Europe to meet the Green Deal targets, 500,000 homes must be upgraded weekly. Facilitating this transformation will put a wind of change in motion for local governments (public sector), financial services (private sector), and ultimately consumers.
Natalia Slota
November 16, 2023

This blog content is taken from our report “Are Green Mortgages the Bridge to a Greener Housing Landscape?” - read the report in full here.

Financing renovation projects and supporting energy-efficient new builds and modifications, which we’ll call green mortgages and sustainable finance, will play an essential role as a lever for this change. Our analysis shows, however, that this positive transformation also comes with increased complexity for lenders and borrowers

Borrower awareness around energy efficiency and how the upgrades can impact the long-term value of their property and energy bills would need to increase. Combining this view with a complex financing decision will be a shared responsibility with lenders where lenders must upgrade their  advisory processes to support borrowers in making the most suitable decisions. Back offices will also be charged with more verification work to ensure that the financings contribute to the sustainability goals imposed by regulators or the boardrooms of the lenders.

Implications for Lending

The financial sector plays a crucial role providing loans for home acquisition, renovation, and construction. Nevertheless, introducing layers of energy efficiency and sustainability into this landscape adds extra complexity to an already intricate process. As we interacted with industry leaders during our preliminary interviews, one insight became apparent: "We are loan advisors, not architects", which highlights the evident challenge.

However, considering a property as a dynamic asset capable of appreciating not solely due to location or aesthetics, but also through its energy performance, opens doors to potential economic gains for both lenders and borrowers over time. The potential increase in property value, underpinned by positive environmental contributions, could further accelerate the process of financing in this context.

In this section, we will delve into the implications on borrowers and do a deep dive into the direct consequences that lenders may encounter. For lenders specifically, our focus narrows onto the impacts associated with providing energy-efficient loans on its distribution, product, and front- and back-office operations.

Implications for Borrowers - Increased anxiety through increased possibilities

Numerous reports and surveys have shown that navigating the home financing process often triggers a considerable amount of anxiety. Particularly, the question "Can I afford this property?" evokes anxiety amongst European borrowers. Although intended for a positive outcome, adding energy performance to the equation of a mortgage or loan application adds additional complexity for several reasons:

  1. In a broader sense, the Energy Performance Certificate (EPC) label, indicative of energy efficiency, remains unfamiliar and vague to the majority of borrowers.
  2. Energy-efficient renovations are commonly perceived as costly and challenging to correlate with long-term benefits and savings. Moreover, borrowers have limited knowledge regarding which elements can be financed by banks.
  3. Additionally, available public grants and subsidies can substantially enhance project affordability. However, navigating these incentives often proves intricate due to frequent changes and regional variations.
  4. Notably, this process is relevant not only to borrowers purchasing new homes but also to homeowners considering enhancements such as solar panel installations and improved insulation. Many of these potential projects remain inactive due to financial constraints, unawareness of potential financing options, or both.

Responsibilities for Lenders

We’ve identified 5 key responsibilities that sustainable lenders will need to take in the next years in order to decrease borrower anxiety and to actively support the energy transition.

1. Guiding and incentivising Borrowers towards Energetic Improvements

In order to achieve a truly sustainable housing ecosystem, active participation from borrowers is essential. Guiding and incentivising borrowers to improve the energetic performance of their properties while fulfilling their financial obligations is a key strategy. Sustainable lenders must take on a proactive role in offering expert advice, financial incentives, and attractive terms to encourage borrowers to embark on energy-efficient renovations and upgrades. A cycle of sustainability is produced by fostering a mutually beneficial relationship between borrowers and financial institutions, creating a positive impact on both individual property owners and the environment.

2. Supporting Borrowers in Identifying the Optimal Financing Mix

The road to sustainable housing is paved with diverse financial options, and supporting borrowers in identifying the optimal financing mix represents a critical differentiator. Tailored financing solutions, encompassing a blend of mortgages, consumer loans, and subsidies, can enable borrowers to make well-informed decisions that align with their environmental and financial goals. Sustainable financing institutions must harness data analytics and personalized financial planning to empower borrowers with the tools and knowledge needed to navigate the complexities of eco-friendly financing, ultimately accelerating the transition to green housing solutions.

3. Financing the Right Properties and Building a Sustainable Portfolio

As the quest for energy-performant housing intensifies, financing the right properties takes center stage in pursuing environmental responsibility. Sustainable financing practices must prioritize directing investments and funds towards properties that align with eco-friendly standards and promote energy-efficient technologies. Sustainable financing sets the stage for fostering a collective commitment to environmentally conscious construction and reducing carbon footprints by ensuring financial resources flow toward green housing initiatives.

4. Consider Properties as living assets for the Lender and the Borrower

In the past decade, an increase in the value of a property would be significantly tied to its location, rising house prices or immovable characteristics, making property valuations a rather static process. In an energy performance context, we see 3 trends that will make this process more dynamic and will thus cater to more dynamic lending:

  • Energy performance and, ultimately energy consumption will play directly into the income and expenses of families. Creating a balancing act between financial expenses and energy expenses throughout the lifetime of the financing.
  • Property characteristics related to energy efficiency will positively impact the value of the house. This means that a broader set of valuation criteria are required and must be updated.
  • Further innovations in energy-efficient technologies e.g. EV’s (electrical vehicles) serving as house batteries) can further drive energy performance and might enable continuous lending opportunities.

5. Collaborative Efforts with Regulators and the EU Green Deal

Given the profound importance of this theme, we witness a notable push by (local) regulators and the EU Green Deal towards effecting transformative changes. This collaborative effort emphasises data and document collection, comprehensive monitoring of sustainable portfolios, and the implementation of obligatory renovations. Sustainable financing institutions need to actively adjust their practices to meet regulatory standards, incorporating environmental factors into their lending criteria. This contributes to the shared effort of attaining climate and sustainability goals, while also fulfilling ESG criteria.

As the importance of sustainable financing continues to grow, it emerges as a powerful force driving the transition towards a more sustainable housing landscape. Financial institutions can play a transformative role in shaping a more eco-friendly future by financing the right properties, guiding borrowers toward energetic improvements, and facilitating the optimal financing mix.

Albeit strong the push may be, this transformation also requires downside risks that should be mitigated as much as possible:

  • Focusing too strongly on energy-performant lending might make financing less available to sure home buyers and thus make this finance possibility only available for the happy few.
  • EPC-values and the overall taxonomy of the energy performance of a house, there’s still ambiguity and incorrectness of those scores. Meaning that today a misinterpretation can lead to financings that will not contribute to the overall goal.

Closing Remarks

In a world where sustainability is a collective responsibility, Green Mortgages offer solutions towards the future of finance. As we stand at the crossroads of environmental awareness and financial innovations, it's clear that Green Mortgages are more than a trend; they will be bridging us to a more sustainable future.

In this ever-changing landscape, we encourage lenders to think about their roles as agents of change. The choices made and the paths taken today, will resonate far beyond now, shaping a future defined by sustainable progress. By collaborating, innovating, and committing to responsible lending, we can shape a future where financial progress and environmental well-being go hand in hand.

Would you like to learn more?

Read more about the impact of green mortgages on the lending products, best practices for lenders and the case studies of successful initiatives:

The report was created in partnership with Setle.


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