Originally published in Mortgage Finance Gazette magazine
On 27 June the Climate Change Act 2008 was amended to make the UK the first G7 country to legislate for net zero carbon emissions by 2050. The Labour Party has mooted an even more challenging timeline – to reach net zero by 2030.
The ambitions are certainly high but to turn them into reality the UK needs a comprehensive strategy to up the green credentials of our housing stock. Given the number of beautiful, old but draughty homes around the country, it is unsurprising that 15% of the UK’s carbon emissions are produced from our homes.
Government clearly sees an important role for lenders. The Green Finance Strategy talks about setting requirements for lenders to help households improve the energy performance of homes they lend to as one potential policy option. There is also further talk about ‘green mortgages’, with a £5 million competition fund set up. The BSA understands this 'prize fund' will be shared among lenders that can demonstrate innovative ways of incentivising borrowers to improve the energy efficiency of their home. There is also a £10 million fund for firms to design ways of cutting the cost of retrofit, potentially using Modern Methods of Construction (MMC).
Much of this work will be supported by the Green Finance Institute, headed by Dr Rhian-Mari Thomas, the former Global Head of Green Banking at Barclays. There is a lot to be getting on with, but as I said in my speech at this year's BSA conference, we see a role for building societies to lead the way in the green space and have received a good response from the sector to the latest initiatives.
Building societies typically make twenty-five to forty-year lending decisions: with the current pace of climate change, ‘green’ could be a material factor in risk assessments on at least some of those. This has been a key focus of the PRA's work, requiring lenders to nominate a Senior Manager to manage climate change risks by October.
Inevitably this will move from a compliance exercise to one of wider business transformation, as Boards look to capture the opportunities presented by green finance.
I explored green and sustainable finance in the summer edition of Society Matters magazine, highlighting its increasing significance in our sector. Evidently it is an area primed to spring firmly onto the radar of consumers in the coming months and years. Let’s just hope the wider financial services industry is ready.
Another growing concern is the FCA’s proposed changes to responsible lending rules and guidance, leaving swathes of consumers - now dubbed ‘mortgage prisoners’ - stranded on higher-rate mortgages
The FCA’s most recent consultation highlighted that around 500,000 consumers in closed books should be contacted, explaining their eligibility under the new affordability proposals. The introduction of Mortgage Market Review (MMR) and the Mortgage Credit Directive (MCD) has made it difficult for these consumers to switch to lower-rate products, leaving some struggling to meet repayments.
Although both MMR and MCD were rightly introduced to help better regulate the wider mortgage market, mortgage prisoners certainly received the raw end of the deal. It is positive to see the FCA addressing the regulatory barriers that restrict mortgage prisoners from re-mortgaging to more affordable rates. However, the FCA have estimated as little as 2000 mortgage prisoners may be helped by this intervention.
This time last year, lenders signed up to a voluntary agreement that provides eligible borrowers with the opportunity to switch to a cheaper mortgage with their existing lenders. This provided a route to alleviate some of the problem, but take-up from consumers so far has not been great. As it stands, there are still many consumers with unregulated entities who have no way out of their situation.
Part of the challenge with helping mortgage prisoners is that current data on the mortgages, borrowers or the interest rates being charged in these books is sparse and generic. Moving forward, it is crucial that the industry can profile mortgage prisoners’ circumstances to properly map out a solution. The BSA has requested more granular data from the FCA. The provision of this data, profiling the mortgages held in these closed mortgage books, will help lenders determine whether they want to adopt the modified affordability approach. Even with this additional information some lenders may decide that adopting this modified approach is beyond their credit risk appetite, and inevitably there will be individual cases that are effectively not re-mortgageable on any sensible commercial terms. Adoption of these rules is a commercial decision for the mortgage lender.
Positively, the FCA has set up an implementation group of lenders to take forward this work – BSA members will form part of this group and the first meeting will take place soon. Mortgage prisoners need help urgently and we call on the Government to extend FCA powers to ensure all customers in closed books have full protection.