Is the Green Deal a big deal?

Everyone in Europe is watching with great interest how the Green Deal will be implemented in Britain.  It is one of the big “experiments” in trying to improve financing for building retrofits.  The Green Deal has just started and it has, not surprisingly, gained much press attention.  This article by Lisa Bachelor for The Observer looks at the Green Deal from a different perspective – trying to sell the house.  The strength of the Green Deal is that the loan stays with the house, for the new owner to continue paying off.  Well, practice may not follow the theory.

Why the Green Deal could make your home a hard sell

The government’s fuel-efficiency scheme may cut your electricity bill – but prove a problem when you want to sell your house

Homeowners who sign up to the government’s new energy efficiency savings scheme, Green Deal, could find that they are hit with a big bill when they come to sell their property, according to some sources.

Starting January 28th, the government wants householders to sign up to the deal, which will allow them to pay for energy efficiency improvements in their home with no, or little, upfront cost; instead, they will be funded by a loan repaid through their electricity bill.

Crucially, the “golden rule” of Green Deal means that you should not pay back more in loan repayments than you are saving on your energy bill. It is hoped that the scheme will appeal to the millions of householders who face escalating energy bills that have reached an average £1,350 a year.

The loan stays attached to the property’s electricity bill until it is paid off, so if the person who has set up the deal arrangement moves house, the bill is met by the new owner. However, this could cause problems if the new buyer doesn’t like what he or she sees – or doesn’t see, in the case of an improvement such as solid wall insulation. In those circumstances, a seller would either have to foot the bill or risk losing a buyer.

“We have concerns that a potential buyer looking at a property may not value the improvements carried out under Green Deal and may not want to pay for them,” a mortgage industry source told the Observer. “Buyers may also consider that the benefits of any home improvements have already been factored into the sale price, and that the loan repayments on their electricity bill are therefore an extra cost that they don’t want to pay.”

Green Deal was unveiled by the government in 2010 but the finance packages to fund it only become available tomorrow. Despite the government’s enthusiasm for the scheme and the fact that companies have been carrying out home assessments for the last few months, the vast majority of people have never heard of it. A survey by uSwitch last week found that four out of five UK households have no idea what it is – not a surprise when some providers don’t seem geared up for the big launch.

When signing up to the deal, householders must contact a Green Deal assessor or a provider to arrange an assessment of the energy efficiency of their property and recommend improvements, but most assessors will charge you an upfront fee for the assessment. Research by the Observer found that while this is typically £99, it could cost more than £150. This is usually only reimbursed if the company providing the assessment is then chosen to carry out the works.

Your chosen provider will cost the improvements for you and work out a plan for how much you will pay back and over what period. Repayments are added directly to your electricity bill each month. The typical length of a repayment arrangement is expected to be between 15 and 25 years, with an interest rate of 6.9% charged on the loan.

Rachel Tandy, a barrister who practises in consumer law, also has concerns about passing on the arrangement between homeowners.

“Hidden away in the Green Deal Code of Practice is a clause that says if there is a new occupant in the property, the Green Deal provider has to do a new assessment on those occupants,” she says. “This could mean that they are assessed as likely to use more energy. If they have outstanding energy debts the provider must also take this into account, but they are not obliged by the Code of Practice to consider any other credit problems when assessing affordability.”

Steve Playle, a trading standards officer who has worked with the government on the doorstep marketing side of the deal, has also expressed misgivings about the impact of selling a home with a Green Deal plan attached.

“The notion that Green Deal plans will be passed on to future buyers of your home is flawed,” he says. “If you are buying a house for £300,000 and the seller says you have to pay an extra £60 a month for the double glazing, chances are you’ll say no and ask them to pay that off first. I know I would.”

If homeowners do end up having to meet the remaining cost of any Green Deal plan in order to sell their home, the financial penalties could be severe. A provider is allowed to charge a substantial fee for early repayment if they want to. This is because under the regulations for the deal the provider is entitled to claim for the interest that would have been paid by the homeowner should the deal have run its course.

Consumer body Which? is warning anyone taking out a loan to scrutinise the terms and conditions very carefully, especially those relating to early repayment. “This [the imposition of early repayment charges] is something Which? has argued against strongly because it could amount to a lot of money and we will be scrutinising this closely,” it says.

Some consumer bodies – and shadow climate change minister Luciana Berger – have expressed concerns over the ongoing cost of the scheme to householders.

The interest rate on the loan is higher than the rate somebody would pay if they extended their mortgage or, in most cases, if they took out a regular personal loan or a no- or low-interest credit card to pay for the improvements.

“To be successful the Green Deal must be a good deal for the public. Unfortunately it looks like high interest rates on Green Deal loans will leave many paying back more than twice the upfront cost of the measures they install,” Berger says.

For improvements worth £10,000, a 7% loan paid back over 15 years would cost £90 a month. Extending a mortgage by the average SVR of 4.35% on a repayment basis over 15 years was estimated to cost £75.73 a month.

Even where monthly repayments are lower under the scheme, the overall cost of the improvements once the loan interest is taken into account could be substantially more than if they were paid for upfront.

There is also a question mark over whether the fees quoted for the improvements are going to be competitive. Some of the Green Deal providers include the big energy companies, which are notorious for charging over the odds for things like new boilers. In 2010, Which? carried out an investigation that concluded that using British Gas rather than a local fitter to install a boiler costs 39% more on average.

The government has launched a cashback scheme to encourage householders to sign up to Green Deal. You can get up to £650 back for agreeing to certain home improvements.

Providing little help

If there is one thing you can be sure of when it comes to buying home improvements such as double glazing, you face a hard sell. Or do you? I called the nine Green Deal providers listed for my postcode on the government’s website to find out about how much the deal would cost me and when they could start.

I was fully prepared with details of my energy rating from my home’s Energy Performance Certificate, details of my last bills and even an idea of the measures I wanted carrying out.

However, only four of them were able to give me any details of cost, and none asked me for my address or any further information. None mentioned any form of cashback, while most told me to call them at a later date.

“Call back in two or three weeks and we might know more,” said one.

“The software is not ready yet and you’ll find every other company is in the same boat,” said another. “Try calling us again in two weeks.”

One provider listed as the Green Deal provider in my postcode area said it would not be ready to offer an assessment until April at the earliest. Three more took my number but never called me back.

Of the four I spoke to, all quoted a £99 assessment fee, to be reimbursed if I carried out the measures through them. Another had an answering phone message that listed an assessment fee of between £154 to £175 depending on the size of the property. It asked me to leave my details on its answerphone.

Only two were able to give me any idea of the potential cost of the loan. One said the interest would be between 6% and 8%, the other said between 7% and 9%.