There has always been a concern that we are not adequately valuing our investments in energy efficiency. James Phillips writes on the BusinessGreen website about a new report that claims mortgage lenders are using inaccurate models to estimate energy bills and mortgage affordability
Energy efficient homes ‘undervalued by almost £50,000’
Banks could be undervaluing energy efficient homes by as much as £45,000, a new report has claimed, despite new lending rules designed to take better account of household spending.
The report from the UK Green Building Council (UK-GBC) and the University College London (UCL) argues that current models used to estimate energy costs are resulting in inaccurate predictions, thereby pushing down the prices of energy efficient homes.
Mortgage Market Review (MMR) legalisation, introduced last year, requires mortgage providers to take a greater notice of household spending, in order to ensure borrowers are able to afford to repay their mortgages.
However, the new study found energy efficient homes are being inadvertently penalised, with mortgage providers using “crude” calculations to make inaccurate energy bill assessments, despite electricity and gas making up one of the largest proportions of household expenditure.
Consequently, energy bill savings delivered through efficiency measures are often overlooked when making mortgage offers, it found.
Richard Griffiths, a senior policy adviser at UK-GBC and a co-author of the report, told BusinessGreen that mortgage lenders could easily make use of fairly accessible data, such as a property’s Energy Performance Certificate (EPC) rating, to gain a better understanding of what potential buyers can afford before making offers.
The report’s authors created a model which they say can be easily adopted by banks and other lenders to estimate energy costs based on factors such as the property size, the number of occupants, and the property’s age.
For example, banks would estimate the energy bill of a post-1990 three bedroom semi-detached house at £1,600, while UK-GBC’s and UCL’s model matches the actual bill of £650. This suggests mortgage lenders overestimate energy costs by almost £1,000, the report said.
If energy prices were to rise by five per cent over a typical 25-year mortgage, the overall gap between the bank’s bill estimates and UK-GBC’s model’s projection would be as much as £45,000, it added.
Ian Hamilton, co-author of the report and a lecturer and senior researcher at the UCL Energy Institute, said the research underlined the need to use energy performance information in making lending and borrowing decisions.
“Having high-quality data on housing energy performance is incredibly valuable,” he said in a statement. “This research illustrates how energy performance information can be used to inform very important purchasing and lending decisions for businesses and households. Providing evidence that can be used by government, industry and households to make decisions on their energy use is essential to bring about a more sustainable demand for energy.”
On the flip side, Griffiths predicts the potential increase of property value could incentivise the uptake of energy efficiency improvements. If the value of energy efficient houses increases while inefficient houses see a decrease, customers may be incentivised to make these home improvements, while mortgage providers may offer advances to support their customers, he argued.
The UK-GBC said it is poised to start deeper research with the Building Research Establishment (BRE) and mortgage lenders in order to gain an even better understanding of how energy efficiency measures can impact on house values. The project, which benefits from a grant from InnovateUK, is anticipated to offer an industry-led exploration at a time where the government has been accused of rolling back green housing measures including scrapping its zero-carbon goal for all new homes.
Nevertheless, Griffiths admits that it might take time for banks and other mortgage lenders to adopt its broader model but that, if they agree to do so, both buyers and sellers will see a significant impact on house prices.