Mortgage lenders have a big stake in the UK’s ‘retrofit revolution’.
Why? Well, it comes down to risk and reward.
Mortgages on energy efficient homes are lower risk, with a lower chance of arrears and a higher chance of retaining (even increasing) their value over time.
There’s legislative risk too, with mortgage lenders already mandated to report and reduce their carbon footprint through climate-related financial disclosures reporting – and more legislation likely to follow for lenders as pressure to meet net zero targets rises. Scope 3 emissions from financed emissions (i.e. the emissions resulting from investments or lending) make up around 95% of the carbon footprint for a lender, and retrofitting is needed to reduce that.
On the reward side of things there’s a huge opportunity for green financing solutions to drive decarbonisation, such as green mortgages which include additional funding for homeowners to retrofit their new home.
Plus, with investors increasingly looking for sustainable investment opportunities, there’s also potential for lenders to securitise those loans in vehicles like a green RMBS.
So, we can see that incentives are there for mortgage lenders to push the retrofit revolution forward amongst their customers.
But whilst some mortgage lenders are starting to take steps to encourage home retrofit, there has been limited progress so far. We still need 19 million more homes to be retrofitted (UKGBC) if we are to achieve the government’s target of all homes being at least an EPC C by 2035.
So what’s holding lenders back? The reliance on inaccurate and outdated property data has a lot to do with it.
The two major barriers to home retrofit in the UK
There is demand for energy efficient homes in the UK.
In recent polling, two-thirds of homeowners said they wanted to improve the energy efficiency of their homes, with the main reasons cited being to reduce energy bill costs, increase property value, improve comfort, and address environmental concerns.
The understanding and desire is there. But studies show that homeowners are being held back by two major barriers
- Perceived high upfront costs of retrofit
- A lack of clarity on how to approach a home retrofit.
A 2024 Energy UK polling report 35% of homeowners said they couldn’t afford the upfront costs, 11% weren’t sure if it was worth the investment, 10% didn’t know enough about the options, and 8% thought it was too much hassle.
Our own homeowner survey took a closer look at these barriers.
1,000 UK homeowners were asked how much they would be willing to spend on retrofit improvements for their home. Spending £2,500 on home retrofit was a realistic budget for 75% of homeowners – a decent chunk of budget that could make significant energy efficiency improvements.
But, when homeowners look for advice on how to use that money to retrofit their home they find home retrofit planning tools that show an average retrofit package to get to an EPC C that costs over £9,000. That’s way out of budget for 61% of the homeowners surveyed – leading them to abandon the idea of retrofitting entirely.
Homeowners are lacking clear and accurate messaging and cost estimates that they need to be persuaded to retrofit their homes.
So how can mortgage lenders help to overcome those barriers to unlock the retrofit revolution and kickstart green lending?
How is unreliable property data contributing to these retrofit barriers?
As we’ve seen, cost is the no.1 barrier for homeowners considering retrofit.
The typical home retrofit planning tool relies on two key property data inputs to deliver a retrofit plan:
- EPC data and costs
- User inputs from the homeowner
It’s well-known that EPCs are an incomplete and inaccurate reflection of the actual energy performance of UK homes.
Our analysis found that only 49% of homes actually have a valid EPC, and many more have an outdated EPC – leaving huge blind spots, especially given these are properties that have had the same owner for at least ten years and are much more likely to be in desperate need of retrofit improvements to reach EPC C.
Those EPCs that do exist are based on a flawed methodology. One of the major flaws is how outdated the methodology, and resulting calculations, are.
The SAP calculations behind EPCs use baselines for energy prices, carbon intensity factors, and improvement costs that were last updated in 2022 – and we all know how much energy prices have fluctuated since then. Before that, the baselines hadn’t been updated since 2012, and given EPCs last for 10 years, many current EPCs are still based on baselines over a decade out of date.
For instance, let’s take a look at solar panels.
An EPC using 2012 costs predicts that a 2.5 kWp solar PV system will cost £6,500 to install and save £270 per year on energy bills – giving a payback period of 24 years.
As of 2023 the actual installation cost was £5,799. With increased energy prices, the actual savings per year on bills is £381.
This gives an actual payback period of 15 years, a 60% higher ROI for the homeowner (without also factoring in the increase in property value for resale) which results in them seeing retrofit as high cost and low reward.
Typically, home retrofit planning tools ask homeowners to update the data that the EPC shows to improve accuracy – asking them to verify how their home is insulated, what the heating system is, the cost of their last energy bill, and so on. Most homeowners don’t have this information to hand, either putting them off further use of the tool entirely or resulting in even more inaccurate data inputs.
Furthermore, home retrofit planning tools typically adopt a whole house approach to retrofit which gives the homeowner a retrofit plan that contains all of the possible improvements to make a property as energy efficient as possible.
Whilst this may be the optimal approach in terms of energy and carbon savings, it means that homeowners exploring retrofits are presented with a very costly package – as we’ve already seen, which is off-putting.
It also gives the impression that home retrofits need to be a large-scale and disruptive undertaking, including lots of new technology that typically homeowners don’t have a detailed understanding of – from air source heat pumps to biomass boilers to cavity wall insulation, and much more.
This adds a further blocker to the home retrofit journey, leaving homeowners confused, unsure what the best approach to retrofit is, and convinced that retrofit is prohibitively expensive.
📖 White paper: The (hidden) cost of free data
The property sector is well aware of the limitations of EPC data, especially when it comes to energy performance and environmental impact. We analysed our enhanced dataset against freely available EPC data to find out the impact this is having on holding back property decarbonisation in the UK.
Get your copy ➡️
How can mortgage lenders overcome the barriers to retrofit?
There are three key actions required to overcome the current barriers to retrofit that we’ve explored so far in this article:
- Ensure homeowners have access to more accurate energy performance data and costs. As we’ve seen, accurate energy performance data with up-to-date costs can make all the difference in demonstrating the true costs and ROI of retrofit.
- Avoid showing homeowners an overwhelming retrofit plan. We’ve also seen that the typical whole house retrofit plan is hugely off-putting for homeowners, so offering a more efficient and focused plan could be a game-changer in the uptake of retrofit.
- Provide retrofit improvement loans. Innovative green lending solutions can help homeowners to cover the upfront costs of retrofit. For instance, a green mortgage could include an additional loan amount to cover the costs of retrofit improvements, with preferential rates once the home has become energy efficient.
Kamma is here to support you with the first and second actions.
Mortgage lenders can access our enhanced energy performance dataset via desktop, API, or bespoke reports.
Lenders can also white label our advanced Retrofit Explorer for use as a tool to drive retrofit uptake for your borrower customers – it uses our dataset for increased accuracy and focuses on cost effectiveness and ROI first instead of showing all possible improvements.
Coupled with your own innovative green lending solutions, it’s a winning combination to drive property decarbonisation and your business goals – starting a virtuous circle of green lending.
Get in touch to find out more about how this could work for your company.
