UK residential buildings account for about 15% of greenhouse gas emissions. To facilitate the transition to a low-carbon economy, the UK government aims to see many homes upgraded to an energy (EPC) rating of C or higher by 2035. Mortgage lenders are key in transitioning to more energy-efficient housing by financing purchases. This transition can be informed by a simple metric – like the portfolio share of mortgages for energy-efficient properties (with a rating of C or higher) relative to all outstanding mortgages, a variant of the Green Asset Ratio.
A well-insulated house reduces heat loss during cold winter periods and it keeps outdoor heat from entering during hot summer conditions. Hence, effective insulation can reduce the need for households to use cooling and heating systems. While this can lower greenhouse gas emissions by households, it also reduces homeowners’ energy bills, which can free up available income. This can protect households from unexpected decreases in income (e.g. reduced overtime payments) or increases in expenses (e.g. healthcare costs). It could also help homeowners to make their mortgage payments even if such shocks occurred. But does this also imply that mortgages against energy-efficient properties are less credit-risky?