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Navigating Green Mortgages: A Practical Handbook for Lenders

Lender
Innovation
Analysis
Continuing our exploration from the previous discussion on green mortgages, let's take a closer look at how lenders can effectively launch green mortgage products.
By 
Natalia Slota
December 21, 2023
TABLE OF CONTENTS

So how can lenders support borrowers in this journey? We now take a closer view of the lenders’ business model and zoom deeper into the impact on the products as well as on the business processes.

Product Impact

The move towards sustainability demands a fresh approach to housing project financing. Past reliance on 100% mortgage loans to cover the projects no longer suffices and a new mix of funding types is essential. Today's blend includes mortgage loans, consumer loans, and subsidies, reflecting the complex nature of sustainability. Lenders need to adjust their range of products to accommodate this change. Their pricing strategies should encourage environmentally friendly housing by offering lower interest rates, added discounts, or reduced fees. Moreover, their risk policies must be updated to consider environmental impact. Lenders will need to transition from conventional risk models to ones that incorporate a new sustainability dimension.

The mortgage journey/value chain:

Activation

Providing initial indications on project feasibility.Expanding mortgage and finance simulations to consider energy performance improving factors, renovation plans, subsidies, and budgeting.Offering guidance and clear content to help borrowers navigate the complexities of green finance.

Advisory

Advisors need to understand the sustainable aspects of properties, potential improvements, and available grants and subsidies.Lenders must help advisors become experts in explaining the impact of energy performance improvement measures.

Fulfilment

Lenders and underwriters must capture and review additional data related to property sustainability.Relying on external advice from experts to assess potential improvements will impact mortgage processing times.Automating data extraction from EPC certificates can improve efficiency.

Aftercare

Post-loan closure, lenders need to monitor portfolio sustainability (after renovation works) and perform extended reporting.Additional reporting requirements create an increased workload for lenders.

How does green finance impact each of the steps?

1. Activation

Incorporating green finance elements adds complexity to the process of determining the feasibility of a client’s project. The conventional approach of offering a simple mortgage calculator, which relies on only 3-4 inputs to estimate monthly instalments, may prove inadequate for prospects considering sustainable financing options. Such a basic tool fails to create substantial value to attract and activate clients in the future.

What can lenders do?

a. Expanding the simulation capabilities: Lenders must transition from using simple mortgage calculators to more comprehensive and sophisticated mortgage channels that include potential real estate improvements, pricing based on sustainability factors, and available subsidies. By offering such simulations, borrowers can better visualize renovation plans and make well-informed decisions about their budgets and investments.          

b. Providing extensive guidance and content around this new topic: Purchasing a house is a significant, once-in-a-lifetime decision for many borrowers and introducing green finance elements further complicates the decision-making process. Therefore, lenders must step up by offering comprehensive guidance and clear content on the subject. By providing relevant information and support, lenders can help borrowers navigate the complexities of green finance smoothly, ensuring a more transparent and rewarding home-buying experience.

2. Advisory

In the advisory stage, green finance significantly expands the scope of responsibilities for mortgage advisors. Beyond the standard mortgage simulation, advisors must delve deeper into the sustainable aspects of the property, identify possible improvements, and assess the property's energy performance. This will require updated tooling.

Advisors can also leverage their strength in building financial plans and showing the returns certain investments might have.

Additionally, advisors are expected to offer guidance on available grants and subsidies to support eco-friendly projects. To meet these new demands, lenders need to invest in training their advisors to become experts in renovation and eco-friendly financing. The advisors' roles have evolved beyond purely financial advice, incorporating elements of architecture and subsidy expertise.

3. Fulfillment

During the fulfilment step, lenders and underwriting teams face the challenge of capturing and reviewing additional data and documents related to the property's sustainability. Gathering these additional data and documents from the borrower will increase the lender's workload and will negatively impact the time-to-yes. Additionally, the reliance on external advice from architects and real estate experts to accurately assess potential real estate improvements introduces additional delays in the mortgage process.

To address these issues and better support mortgage advisors, lenders can leverage technology solutions to automate data extraction from Energy Performance Certificates (EPCs) uploaded by clients or retrieve information from external sources like databases containing real estate data (e.g. EPC). Implementing these tech-driven approaches can save valuable time, boost productivity, and enable a more efficient and well-informed decision-making process for both clients and advisors.

4. Aftercare

Even after loans are closed, the lender has a vital responsibility to monitor the sustainability of its portfolio and conduct regular reporting. However, these additional and extended reporting requirements impose an increased workload on the lender. On a case-by-case level, lenders can also take responsibility to actively monitor the energy improvements made to individual projects. These additional process requirements impose an increased workload on the lender.

To effectively manage their sustainable portfolio, lenders can leverage advanced data analytics and technology solutions. By streamlining the reporting process and automating data collection, lenders can efficiently track and assess the environmental impact of their loan portfolio. This not only reduces the burden on the lender but also enables them to make informed decisions regarding their sustainability initiatives.

Best Practices to Build a Double Positive Impact

Lenders face an important decision regarding their approach towards sustainable finance. They have 3 strategies to consider. One is to follow the basic ‘need-to-haves’ approach, which means focusing on regulatory compliance and implementing the bare minimum. While this might not distinguish them as sustainability leaders, it covers the basics and allows them to keep up with regulatory constraints.

Lenders can also take a slightly more opportunistic approach, combining essential sustainable finance elements with strategic advancements. They build on basics while capitalizing on opportunities to adapt to changes without completely altering their business model. An example of this could be a bank that wants to attract new clients by offering special sustainability products at attractive rates. In this example, the sustainability angle becomes a tactic to expand the business.

On the other hand, some lenders might prioritize sustainable finance as a core aspect of their identity and USP. Embedding sustainability in their full product and process portfolio. They will integrate sustainability deeply into their operations, going beyond compliance and aiming to build a comprehensive ecosystem of sustainable initiatives, products, and processes. This approach positions them as first movers, attracting similar partners and clients. Banks like Triodos, ASN Banks, and GLS Bank in Europe take sustainability as their core driver. We anticipate that more High `street banks will join this club to accelerate the green turnaround.

Each strategy chosen by the respective lenders will require some changes. Based on our market analysis, we’ve identified a set of measures we see lenders take within their strategic role.

Is it relevant to the lenders only?

We believe not. Our analysis shows that wider ecosystem players can contribute positively on a meta-level. Notably, 2 categories: real-estate players as well as mortgage brokers.

- Real-estate players include building promoters and real estate platforms with relevant data about properties' energy performance. They can tie their deep housing expertise to the financing journey. This can create better customer journeys as well as make it easier for lenders to navigate the challenges that come with deeper housing advice.

- Similarly, mortgage brokers, often known for their advice capacity in offering the best solutions for their clients, will need to include sustainability in their advisory processes. Earlier research has shown that brokers thrive in markets where products are complex and there are a lot of different possibilities. Given that a client will require profound advice about its building projects, we think that also mortgage brokers can take advantage of this by highlighting their role as independent advisors looking for the most suitable product in the market.

Closing Remarks

Concluding our discussion, we present a carefully constructed guide for lenders stepping into the world of sustainable finance. From refining product portfolios to seamlessly integrating sustainability into institutional practices, the guide offers insights into the decisions facing lenders. This narrative extends beyond lenders, involving real-estate players and mortgage brokers. Together, we can pave the way for a future marked by sustainable financial practices. Here's to navigating the financial landscape with a commitment to environmental consciousness.

Would you like to learn more? Read more about the impact of green mortgages on the lenders and borrowers with relevant case studies in our comprehensive report:


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