Ground-Breaking Energy Efficiency Financing for Homebuyers

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Ground-Breaking Energy Efficiency Financing for Homebuyers

Homebuyers across the EU could be offered better borrowing rates on mortgages in return for purchasing more energy efficient homes or committing to implement energy saving work within properties, under a ground-breaking project being pioneered by a unique partnership of banks, property valuers, energy efficiency businesses and utility providers.

The European Energy Efficiency Mortgage initiative, launched today by a consortium led by the European Mortgage FederationEuropean Covered Bond Council (EMF-ECBC), aims to create a standardised ‘energy efficient mortgage’ based on preferential interest rates for energy efficient homes and/or additional funds for retrofitting homes at the time of purchase.

The project represents the first time a group of banks, mortgage lenders, businesses and organisations from the building and energy industries, have come together to offer energy efficient mortgages. The project partners are the Ca’Foscari University of Venice, RICS, European Regional Network of Green Building Councils, E.ON, and SAFE Goethe University Frankfurt.

Creating a private bank financing mechanism to encourage the energy efficient improvement of households is a key means of helping the EU to meet its energy saving target of 20% by 2020, and to deliver on the ambition of the historic climate change deal, the Paris Agreement, reached last December.

It is also particularly timely given the growing global institutional and investor interest in climate finance and private sector investment required to fund low carbon initiatives, which will be the main focus of COP22, the next major climate change conference which takes place in Marrakech in November.

The European Energy Efficiency Mortgage initiative will explore the link between energy efficiency and borrower’s reduced probability of default and the increase in value of energy efficient properties. For banks and investors, this could lead to loans which represent a lower risk on the balance sheet and could therefore qualify for a better capital treatment. It could also ensure that banks are able to recognise ‘energy efficient’ assets in their risk profiling, which would begin to help the market to price-in the added value of energy efficient real estate. 

The initiative is launched today at the World Green Building Council’s BUILD UPON Leaders’ Summit in Madrid, where 200 refurbishment leaders are gathering to discuss how to tackle energy efficiency in Europe’s existing buildings.

Emmanuel Normant, Vice-President for Sustainable Development at Saint-Gobain, said:

“As we need to speed up progress to meet our climate ambition, Saint-Gobain welcomes this timely initiative which has the potential to accelerate the uptake of renovation in Europe. Forging a common understanding of the value of energy efficiency between all players and private banks is an essential step to unlock investment in energy efficiency."

In the EU, buildings are responsible for 40% of the total energy consumption and 36% of CO2 emissions. By improving the energy efficiency of buildings alone, the EU’s total energy consumption could be reduced by 5-6% and CO2 emissions by 5%.

Research in the US shows that borrowers financing energy efficient properties have a 32% lower probability of default on their loan. This is because the energy costs, which represent a large share of the monthly payments by the borrowers, are lower. Research by the UK Green Building Council also shows that mortgage lenders could include more accurate estimates of energy costs in their lending assessments, which could reduce the risk of over- or under-lending by many thousands of pounds over the life of the mortgage.

If the same correlation between energy efficient investment and default risk can be evidenced in the EU, banks will be able to demonstrate that energy efficient mortgages are less risky and can therefore consider lower capital requirements for those loans.

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