Privately owned residential properties represent approximately 15% of the UK’s overall carbon emissions, but the 14.9 million privately owned homes are also one of the most difficult built environment sectors in which to implement energy efficiency improvements.
With approximately £127bn of mortgage lending each year, the mortgage process presents a potential opportunity for influencing homebuyers’ views on energy performance and encouraging property energy improvements. At present though, lender calculations, used to determine how much mortgage customers can repay, take no account of how their fuel bills vary with the property’s energy efficiency.
The LENDERS project was set up to analytically examine the link between property energy efficiency and fuel bills, and ways in which this link could enable homes with better energy performance to be able to demonstrate lower fuel costs in a way that can be passed on as a tangible benefit to homebuyers.
Through use of comparatively large data sets, the project has been able to map the relationship between property energy performance and household fuel bills. It has created a working calculator through which homebuyers can access, with the provision of limited property and household information, estimates of their likely bills before they have purchased the home. Based on larger data sets than those underpinning the existing calculators, the project has demonstrated it is possible for mortgage lenders to utilise better energy performance estimation to demonstrate within their lending decisions that funds not committed to fuel costs in low energy homes can support higher maximum mortgage lending amounts.
Currently, 90% of mortgage lenders use cost data taken from the Office of National Statistics “Family Spending Report” (ONS FSR), which includes fuel bill data from 4,900 UK households, to inform their affordability calculators. Typically, mortgage providers adjust the ONS FSR data with their own occupancy, income and other profiles to estimate overall household expenditure; by doing this the process does estimate every individual cost element such as fuel but is only intended to be considered in aggregate. Whilst ONS base data gives a fuel bill range of £65 per month for the lowest 10% of household incomes up to £146 per month for the highest 10%, after adjustment fuel can account for a decreasing percentage of total expenditure as household income and actual costs increase.
Whilst it has not been possible to comprehensively map mortgage lenders’ current affordability calculations for commercial reasons, the LENDERS project has demonstrated a significant variance between the implied fuel costs and the evidence available for actual fuel bills. Furthermore, LENDERS research shows that no known affordability calculation takes direct or indirect account of the energy efficiency.
Having identified the issue, the project investigated whether these more accurate predictions of future fuel bills could be utilised at different points in the mortgage process, and whether it is appropriate to apply the more accurate LENDERS assumptions on fuel expenditure to affordability calculators.
The findings suggest that there are likely to be opportunities for mortgage lenders to improve the accuracy of the data that they use when assessing affordability to more closely reflect the actual energy performance of a home and its occupants. This could then be used to inform and encourage homebuyers of the benefits of owning an energy efficient property by highlighting the potential savings on their fuel bills and the impact the increase in disposal income could have on their borrowing capacity. The project has found that the monthly savings from fuel bills in a higher rated home (equivalent to two EPC bands), could equate to around £4,000 in additional mortgage finance.
The project acknowledges any process to incorporate these changes is not straight-forward: There is not a one size fits all solution (due to the range and complexity of lenders’ systems), and the disparity between different lender’s assumptions of overall expenditure costs mean homebuyers would currently see more variation in maximum offer here than resulting from energy performance. The project also recognises only a minority of homebuyers borrow to near their maximum affordability; it is these customers that could benefit from increases in disposable income through lower energy bills which could then be allocated to higher mortgage payments.
However, the project has believes that the benefit of inclusion at the right point in the mortgage process may have a behavioural impact beyond the direct financial benefit, influencing homebuyers’ perception of value implied through higher borrowing limits. To this end, whilst changes to financial structures are rarely quick, more immediate and simpler changes can be implemented off the back of the Project’s findings: A fuel bill calculator has been developed and made freely available to homebuyers, lenders and related parties for use as advice alongside the mortgage sales process, acting as a ‘nudge’ to consumers.
In the long term, we believe that the projects findings will act as a catalyst for the incorporation of energy performance linked fuel costs being a factor in lender affordability calculations.