The role of mortgage lenders in decarbonising UK housing

Mortgage Lenders

UK housing stock is some of the oldest and most energy inefficient in Europe. 

As of the last carbon budget in 2019 UK buildings were responsible for 23% of total annual carbon emissions, with housing responsible for 77% of that – a huge 85 MtCO2e per year from our homes alone.

Each individual home is responsible for 2.77 tCO2e per year on average. 

To put that into context: a typical UK car travels 7,600 miles per year (the equivalent of driving from London to Edinburgh 20 times) and produces 1.7 tCO2e.

To meet net zero targets and prevent worsening climate impacts, therefore, it’s vital that we increase the energy efficiency of UK homes to reduce their emissions.

In 2024 49% of UK homes are still rated an EPC D or below – as per Kamma’s environmental profiling dataset.

Chart showing average EPC ratings in the UK: 49% of homes are below an EPC C

The UK government has set a target of ensuring all fuel poor homes are at least an EPC C by 2030 and as many homes as possible are at least an EPC C by 2035.

So, there’s a long way to go. 

Chart showing the government's target of all UK homes EPC by 2035 vs progress so far – 49% of homes are below an EPC C

And mortgage lenders are a crucial actor in the journey to net zero housing in the UK.

In this article we’ll look at why mortgage lenders are so important, lender progress so far in driving property decarbonisation, and the key barriers to overcome.

Why mortgage lenders have a crucial role to play in decarbonising UK housing

Ultimately, to decarbonise the UK housing stock we need millions of homeowners to retrofit their homes, making upgrades that improve energy efficiency and reduce emissions.

The government, of course, has a huge role to play in pushing for higher standards in the rental market and social housing and supporting homeowners to finance retrofit improvements. 

Whilst progress has been made in some areas, such as heat pump installations, it has been disappointing to see reversals and delays in policy in this area, such as MEES.

Lenders offer another route to incentivise homeowners to retrofit their homes.

The UK government has recognised the vital role of mortgage lenders, running a 2021 consultation ‘improving home energy performance through lenders’

Screenshot of BEIS consultation: Improving home energy performance through lenders

The consultation proposed a target-based approach to push lenders to decarbonise their portfolio.

This would involve lenders reporting on EPC data for their portfolio as well as the value of lending for energy improvement works.

Whilst measures like this have fallen by the wayside under the current government, we’d expect this kind of initiative to return with force as the scramble to meet climate targets becomes more urgent.

“Mortgage lenders could play a vital role in driving the home energy performance improvements required to meet our Carbon Budgets and net zero target. They are uniquely placed to influence mortgagors at critical trigger points, such as home purchase, renovation or re-mortgage. The existing relationships lenders have with their customers, often supported by a strong regional focus, provide a platform for lenders to develop green products that will encourage action from mortgagors by removing financial barriers and thereby help to unlock the value of improved energy performance. “

UK government, 2021 consultation ‘Improving home energy performance through lenders’

It’s easy to see why lenders have been singled out as a vital channel. 

Mortgage brokers have a close relationship with homeowners at the point that they’re buying a new home. This relationship can be harnessed to encourage them to make retrofit improvements to the new home:

  • The perfect time for home improvements. Many new homeowners have a plan in mind to make improvements to their new home anyway, so it’s likely to be an efficient time to make energy upgrades too with minimal disruption – lenders can be the channel for retrofit messaging that cuts through with homeowners.
  • Financial incentives to make retrofit a no-brainer. The upfront cost of energy efficiency upgrades is often what stops homeowners from retrofitting. Lenders can remove this by offering green mortgages which either reward energy efficient homes with preferential interest rates or an additional loan amount to cover those upfront costs.

And it’s win-win, because this benefits the mortgage lending company too:

  • Unlock green lending and attract funding from investors. The Bank of England now mandates the reporting of ESG data on UK property assets, and investors are already walking away from deals that do not supply the necessary insight on climate performance. In contrast, there’s a growing market for sustainable investment. Lenders taking demonstrable green assets to this market (e.g. for green RMBS) benefit from improved liquidity and access to capital
  • Reduced financed emissions. As a financial institution, lenders are required to report on climate risks, opportunities, impact, and progress under climate-related financial emissions. A large proportion of the carbon footprint of a mortgage lender comes from the emissions by the homes they lend on, as part of their financed emissions. Having energy inefficient properties in a mortgage portfolio, therefore, represents a big transition risk and blocker to net zero targets, which encouraging retrofit can help to overcome. 
  • Reduced loan risk. Mortgages on energy efficient homes are less likely to be in arrears and more likely to retain or even increase their value over time, so it’s in the best interest of lenders to encourage their borrowers to retrofit.
How does driving decarbonisation benefit mortgage lenders?

However, as we’ve seen, progress on decarbonising UK housing has been slow so far.

So, what are the key barriers holding mortgage lenders back from driving the retrofit revolution?

What barriers are stopping lenders successfully driving the decarbonisation of UK housing?

UK homeowners are keen to improve the energy efficiency of their homes to improve comfort, increase valuation, and (especially) to reduce their energy bills.

And lenders have been making attempts to help them do so.

According to the Green Finance Institute, the number of green mortgages on the market has increased from three to 50 in recent years. 

But, uptake has been low.

Homeowners are held back from retrofitting by two key barriers:

  1. The perceived high costs of retrofitting
  2. Lack of homeowner understanding on how to approach home retrofit.

The perceived high costs of retrofitting

Much of the rhetoric and advice around energy efficiency improvements has focused on deep retrofits as the best approach, with fabric first and whole house retrofit approaches.

This is ideal in terms of fully optimising a house to the best possible energy efficiency and lowest possible carbon emissions. However, it typically means homeowners exploring retrofit tools are typically recommended a highly extensive package of retrofit improvements at significant cost – anywhere up to £69,000.

Graph showing the budget homeowners can afford for retrofit – for 75% of homeowners the maximum is £2500

The message isn’t helped by inaccurate EPC data, which is typically used as the basis for retrofit recommendations for homeowners and is known to systematically overestimate the costs of energy efficiency improvements and underestimate the ROI via reduced energy bills.

UK property decarbonisation and green lending is restricted by unreliable EPC data. Download the white paper.

This results in homeowners being put off from retrofitting because of the high upfront costs. In a 2024 Energy UK polling report 35% of homeowners said they couldn’t afford the upfront costs and 11% weren’t sure if it was worth the investment.

How can mortgage lenders overcome the barrier of the perceived high costs of retrofit?

  • Introduce enhanced data to show true costs and ROI. Enabling borrowers to access accurate and up-to-date energy efficiency and emissions information for their home (like Kamma’s), instead of relying on problematic freely available EPC data, helps them to see more realistic costs and energy bill savings.
  • Encourage a more cost effective approach. Showing homeowners the measures that can get their home to an EPC C within their budget, instead of presenting them with a whole house retrofit package, helps them to see that retrofit can be cost effective and doesn’t have to be done with an ‘all or nothing’ approach. Our retrofit explorer tool does just that, powered by our enhanced dataset, and is available for lenders to white label.
  • Advertise green mortgage opportunities. Whilst some mortgage lenders have introduced green mortgages in recent years, they typically haven’t done the best job at showcasing them and educating customers on their benefits. Making borrowers aware of lending options that reward energy efficient homes or help them to fund improvements can make retrofit a much easier sell.

It’s also important to note that a ‘one-size-fits-all’ approach to encouraging customer retrofit rarely works – different homeowners have different needs, priorities, and budgets. Kamma’s Chief Growth Officer, Joe Webb, articulated this in our recent webinar on best practice transition planning for mortgage lenders:

Lack of homeowner understanding on how to approach home retrofit

Hand-in-hand with cost as a barrier to retrofit uptake is a lack of education. 

A typical homeowner doesn’t have an innate understanding about how to assess the energy efficiency of their home and identify which retrofit measures will reduce their energy use. 

In fact, Lloyds Banking Group surveyed homeowners for their 2023 Decarbonising UK Homes report and found that only 28% of homeowners believe they know what to do to make their home net zero ready for 2035.

Some homeowners do have access to an EPC to give them this information:

  • Only 49% of houses have an EPC. EPCs last for 10 years, so only homeowners who have bought their home in the past decade have an EPC – and it’s the properties without an EPC that are likely to be most in need of retrofit. Our analysis shows that only 49% of UK houses have an EPC at all.
  • EPCs are inaccurate. The methodology behind EPCs is outdated and flawed, based on a modelled prediction of energy costs rather than actual energy consumption and loss. Because of this, when homeowners do have access to an EPC for their property the analysis of energy performance is inaccurate and recommendations presented to homeowners are not reliable – meaning confusion and complications once retrofit professionals carry out a true assessment.
  • EPCs are valid for too long. EPCs are valid for 10 years. Significant changes can occur in a decade in terms of a home’s condition as well as energy prices and the costs of retrofit materials and installations – we can see this currently with the huge increase in energy costs during the energy crisis and the drop in costs for measures such as solar panels. Our analysis shows that only 24% of UK houses have an EPC dated within the last five years, suggesting many could be giving out-of-date information and recommendations. 
75.6% of EPCs are older than 5 years old

When homeowners search for retrofit information themselves they come upon the same issue highlighted in the cost barrier: the typical advice is to undertake a fabric first, whole house retrofit – which is complex and disruptive as well as costly.

How can mortgage lenders overcome the barrier of the lack of education around retrofit?

  • Develop awareness and educational materials. Lenders are in a prime position to increase understanding amongst homeowners during the mortgage or remortgage process with accurate and easy-to-understand information on the role of retrofit, the different types of energy efficiency improvements, and how to get started.
  • Make a reliable retrofit explorer tool available to borrowers. A tool which enables homeowners to see the energy performance of the property they’re mortgaging and get recommendations on how to improve it can increase understanding. Several lenders have these retrofit tools today, but most are unreliable with insights based on inaccurate EPC data and users presented with an overwhelmingly extensive package of retrofit measures. Kamma’s trusted retrofit explorer tool has been designed to offer more accurate and accessible recommendations, and is available white label for lenders.

It’s worth noting at this point that we know it can be difficult for mortgage lenders to develop educational materials on retrofit and communicate it effectively to homeowners – every home is different and, after all, mortgage brokers aren’t energy efficiency experts either!

The Green Finance Institute has developed a handbook for lenders on green home retrofit, which is a useful starting point.

Screenshot of Green Finance Institute's lender handbook on retrofit

Our retrofit explorer tool is a valuable resource for your homeowners customers, with evidence-based education on different retrofit measures and benefits. We’ll soon be further expanding on this with resources and materials on home retrofit for mortgage lenders to use with homeowner customers to increase uptake – sign up to our newsletter to be notified when this guidance is available. 

Screenshot showing the opening screen of Kamma's Retrofit Explorer – enter your address to get started.

“We want to offer real incentives to customers seeking to borrow in order to improve their home’s energy efficiency. We’re delighted to partner with Kamma whose Retrofit Explorer tool can also illustrate further benefits from making positive changes. Together we’re aiming to drive genuine change for our customers.”

Steve Matthews, Head of Residential Lending at Octopus Real Estate

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