House buyers could be missing out on as much as £15,000 on the value of a new mortgage application because fuel costs are not being accurately considered as part of mortgage affordability checks. This is one of the findings of recently published research by BRE for the Wales Low / Zero Carbon Hub (WLZCH).
An assessment of more than one hundred properties throughout the UK, described in the project report Energy Performance Certificates & Mortgages, has found that fuel bills incurred by similar sized properties can vary by more than £90 per month – simply because of their energy efficiency.
This is the first time that a link has been demonstrated between real energy bills and a property’s Energy Performance Certificate (EPC). It could have a huge impact on the mortgage market, as £90 per month equates to about £15,000 potential difference in the maximum mortgage amount over a 25 year mortgage.
EPCs grade a property’s energy efficiency from A to G, with A being the highest rating. They are required by law on every property in England and Wales at the point that it is sold or rented. Demonstrating that EPCs can help predict more accurately a property’s annual energy bill has significant potential to impact on responsible lending, something increasingly under scrutiny by the Financial Conduct Authority in the UK. At present, most mortgage lending institutions use an estimation of fuel costs that are averaged across UK homes as part of their calculations for mortgage “affordability”.
Commenting on the findings, Chris Jofeh, chair of the WLZCH said: “This report highlights that, simply by using information already available on a property, mortgage companies could be lending more responsibility to their customers. By changing their approach slightly, using the property’s EPC to estimate real fuel bills rather than applying a national average, mortgage lenders could incentivise homeowners to purchase more energy efficient properties.”
A change in attitude of both buyers and lenders would go some way towards helping to meet carbon reduction targets, as the demand for more energy efficient properties increases. The report recommends that maximum mortgage offers should be graded in accordance with the EPC rating, allowing borrowers to take out bigger mortgages on more energy-efficient properties. This could, in turn, begin to generate a difference in market value between low and high energy-efficiency properties that the residential market has not seen previously.
Using EPCs in mortgage affordability calculations could also support existing owners who wish to improve their property’s energy performance. Using anticipated changes to the EPC rating of the property, a mortgage institution would be able to calculate how much additional capital lending the borrower will be able to afford once the home improvement works have been completed. This creates a virtuous circle of enabling additional mortgage lending to fund the improvement works that make the repayments affordable to the home owner.
According to Chris Jofeh: “Using a property’s EPC data at the time of purchase or remortgage could help provide a funding mechanism for customers to be able to refurbish their home and benefit from lower bills”.
The Wales Low/Zero Carbon Hub, which is funded by the Welsh Government, intends to use the findings of this report to work with mortgage lenders to develop products that recognise the significance of lower EPC ratings on mortgage affordability.
The full Energy Performance Certificates & Mortgages report can be downloaded from: http://www.cewales.org.uk/valuation-demand/