Lenders use inaccurate models to value energy efficient homes

Mortgage lenders are undervaluing energy efficient properties by as much as £45,000…

A new report from the UK Green Building Council (UK-GBC) and University College London (UCL) has warned lenders are using inaccurate models to estimate energy costs. This is leading to many energy efficient properties being undervalued by as much as £45,000 over the life cycle of a mortgage.

Legislation introduced last year was designed to prevent this kind of situation from occurring. The Mortgage Market Review (MMR) requires lenders to take into account household spending. This is to ensure borrowers are able to afford their mortgage repayments.

However, lenders are using “crude” calculations to assess bills in energy efficient properties, meaning efficiency measures are often overlooked when mortgage offers are made.

The authors of the report have created a model that can be used by banks and lenders to estimate energy costs more efficiently. This is based on a number of factors including the size of the property, how many people live in it, and when it was built.

To put the situation into context, the authors looked at the estimated energy bills for a post-1990s three bedroom semi-detached house. Lenders estimated this property would have energy bills of £1,600.  However, the model used by UK-GBC and UCL puts the estimate at £650, which matched the real bill for the property. This means lenders are overestimating energy costs by almost £1,000.

The authors said if prices were to increase by five per cent during the typical 25-year mortgage period, the gap between estimates from lenders and the model projection from the UK-GBC and UCL would be as much as £45,000.

Co-author of the report and senior researcher at the UCL Energy Institute Ian Hamilton said: “Having high quality data on housing energy performance is incredibly valuable.

“This research illustrates how energy performance information can be used to inform very important purchasing and lending decisions for businesses and households.

“Providing evidence that can be used by government, industry and households to make decisions on their energy use is essential to bring about a more sustainable demand for energy.”

Richard Griffiths, a senior policy adviser at UK-GBC and a co-author of the report said this knowledge could push up the value of properties, adding incentive for home owners to implement energy efficiency improvements.

Research between the UKGBC, the Building Research Establishment (BRE), and mortgage lenders will now take place to gain a greater understanding of how energy efficiency impacts the value of a property. The research will receive grant funding from Innovate UK.

Lenders use inaccurate models to value energy efficient homes. [online] Available at: <http://planningandbuildingcontroltoday.co.uk/energy-efficiency/lenders-use-inaccurate-models-value-energy-efficient-homes/19994/ > [Accessed 29 September 2015].