Net zero red tape to create new generation of ‘mortgage prisoners’

Two people trapped in a house

Net zero rules for homeowners risk giving birth to a new generation of mortgage prisoners, the heads of some of Britain's biggest lenders have warned.

Government proposals could force mortgage lenders to hit green targets have prompted fears homeowners will be unable to refinance and become hostage to costly loans.

The Department for Energy Security and Net Zero wants to introduce voluntary targets for mortgage lenders to ensure the properties on their loan books have Energy Performance Certificate ratings of C or better by 2030, but could make these targets mandatory.

But major lenders including Skipton Building Society and trade bodies representing the UK's largest high-street banks have said homeowners who fail to increase the energy efficiency of their houses by the deadline may render their properties unmortgageable.

Charlotte Harrison, Skipton Building Society’s chief executive of mortgages said lenders had worries over the “unintended consequences” of the Government’s plans.

“There is a real intent among lenders to support borrowers to make their houses more energy efficient. But we don’t want to move to a state where we have to say ‘we don’t want to lend to you because you’re not in an A, B or C energy band and we don’t want you to pull our book average down’.

“We don’t want to create a population of property prisoners. We need a pragmatic approach to make sure we don’t end up in that situation.”

She added avoiding such a situation would require intervention such as making it easier to borrow or obtain grant funding for eco upgrades.

It echoes comments from the chief executive of Britain's banking trade body UK Finance, David Postings, who said earlier this month net zero plans risked leaving homeowners unable to obtain a mortgage and the “creation of a new cohort of property prisoners”.

Close to 13 million houses still have an energy performance rating of D and E, according to data updated last month by the Department for Levelling Up, Housing and Communities.

Around 40pc of UK emissions come from households, making property an essential component of the Government’s net zero target by 2050.

The UK has one of the oldest housing stocks in Europe, meaning millions of properties are still yet to meet the Government targets.

Some lenders are already offering so-called “green mortgages” to borrowers.

These either offer a lower interest rate on properties with better energy efficiency ratings, or discounted rates for top-up loans to be used for retrofitting.

But those who are unable to meet the standards and cannot refinance face being rolled onto lenders' “standard variable” mortgage rates, which are far more expensive than fixed-rate deals.

It comes as average two-year, fixed-rate mortgage deals have risen to 5.3pc, after central interest rates climbed from historic lows of 0.1pc.

The first wave of mortgage prisoners emerged as a consequence of the 2008 financial crash.

It saw the mortgage of thousands of borrowers of collapsed lenders such as Northern Rock sold to new firms.

Sitting on historic loans created under more relaxed lending rules, these borrowers have struggled to switch onto new deals. Many are still stuck on high standard variable rates, as they are unable to obtain loans under modern-day banking rules.

The Government’s proposals, first published back in 2020, do suggest certain properties which cannot get to a C band rating or higher could be granted exemptions, as long as the owner can evidence they have already spent a certain amount on upgrades.

But Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, a trade body, said it was unclear what this exemption would look like.

Estate agents have reported a spike in buyers asking about energy performance ratings over the past year.

Some buyers are requesting to see current occupiers’ bills, while others have managed to knock £100,000 off the property price due to poor energy performance.

Growing interest in energy efficiency comes amid an energy bills crisis and increasing concerns on climate change.

The Government's net zero agenda has driven a string of policy consultations on how Britain can minimise its carbon footprint.

Damian Thompson, director at Nationwide’s buy-to-let arm The Mortgage Works, said funding of green improvements was leading to the emergence of an entirely new industry, but added enhancements were needed to help homeowners make the upgrades required.

This, he said, should include a national training programme supporting tradespeople in obtaining skills to deliver increased levels of insulation and low-carbon heating at scale.

“Greater investment in areas like planning is also needed due to the expected increase in applications, while the process for feeding energy back into the National Grid must be streamlined,” he said.