A home’s energy efficiency is a major factor in its valuation.
Energy efficient homes are already more desirable amongst potential buyers – likely because of affordability factors. In fact, research suggests that home buyers will pay a ‘green premium’ of up to 15.5% more on average for a home with high energy efficiency standards, and sometimes up to 20% more.
Further, many studies have linked home retrofit improvements to an increase in property valuation, from BOXT to Santander to Rightmove, and many more.
We reviewed all of these studies for our white paper The (Hidden) Cost of Free Data, and on average the studies conclude that there is a 12.5% increase in property valuation through improving the property’s EPC rating to C or above.
This direction of travel towards heightened valuations for energy efficient homes will only accelerate from here on.
Why? Because the combination of growing environmental concerns and drastically increased energy bills has led to energy efficiency becoming a core factor for buyers deciding on their next home purchase. In Knight Frank’s latest Buyer Survey 80% of buyers said that the energy efficiency of their next home purchase is now more important to them than it was a year ago.
Plus, we can expect to see new policies introduced in the near future to drive improvements in the energy efficiency and carbon impact of UK homes which will further increase the demand for energy efficient homes and, therefore, their cost.
On the flip side, this also means that energy inefficient homes are likely to lose value over time.
What does the link between energy efficiency and property valuation mean for mortgage lenders?
Of course, property valuation is vital for mortgage lenders.
Lenders need an accurate view of a property’s current value and its ability to hold that value for the duration of the mortgage, to determine the loan that they are willing to give to a buyer. This effectively ensures that if the borrower was to default on their mortgage payments, the lender could sell the property and recover the full loan amount.
We’ve seen that energy efficient homes are likely to retain and even increase their value over time, as energy efficient homes become more and more desirable, whereas energy inefficient homes are likely to lose value.
For the mortgage lender, this means that energy efficient homes are much lower risk for them to lend on.
Some lenders might choose to prioritise loans on properties with higher energy efficiency. Some might introduce LTV limits for properties below an EPC C. Some might focus on educating existing mortgage holders on the benefits of retrofitting their home to improve energy efficiency (and therefore property value). Some might provide green lending options to help them cover the upfront costs of retrofit – like Octopus Real Estate’s refurbishment loan with discounted interest rate for refurbishments that also improve energy efficiency.
All of these actions require mortgage lenders to have access to energy performance data as they assess risk level during the underwriting process – without adequate and accurate energy performance data it’s impossible to make informed decisions on this risk.
Why mortgage lenders need better energy performance data
As it stands, a typical mortgage valuation takes the EPC certificate of a home into account when determining the property valuation, whether done by an in-person survey or an AVM.
EPCs provide inaccurate information, with the SAP 2012 methodology being out-of-date and using flawed assumptions. This gives mortgage lenders an inaccurate view of the value of a property when it comes to energy efficiency and leaves them vulnerable to risk.
Did you know: inaccurate property valuations aren’t the only risk blind spot being caused by incomplete, unreliable, and out-of-date EPC data 😬
Read more ➡️
And energy efficiency as a risk factor is only growing in importance, as we’ve seen.
Mortgage lenders desperately need better energy performance data to ensure accurate risk assessment.
That’s why at Kamma we’ve developed a reliable and real-time dataset of the energy and environmental performance of UK housing.
We combine EPCs with additional data from a range of sources, which is then checked, corrected, and calibrated. Where there is missing data (because only 49% of UK homes actually have an EPC in the first place) our intelligent predictive modelling fills the gaps to an incredibly high level of accuracy.
