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Press release

26 OCT. 2017

Energy Efficient Mortgages to play key role in sustainable finance strategy

Energy efficient mortgages could play a central role in Europe’s new strategy for sustainable finance, states a White Paper published today under the EU funded ‘Energy Efficient Mortgages Action Plan’ (EeMAP) Initiative - which sets out key recommendations towards the creation of an energy efficient mortgage product for Europe.

With further details on the EU’s plans to integrate sustainability considerations into financial policy expected later this year, the EeMAP White Paper sets out the technical actions needed to ensure mortgage lending can support the EU’s climate and building renovation goals. It also puts forward technical recommendations in order to begin collecting energy efficiency loan data to ensure financial regulators recognise the potential risk mitigation of home energy efficiency. The idea is that lower risk on the balance sheet of banks should qualify for lower capital requirements, delivering a strong incentive for banks to enter the market. 

The recommendations in the White Paper build on four EeMAP research reports also published today, which show how energy efficient mortgages could work by examining current market practices within the areas of green finance, building performance indicators, property valuation and the impact of energy efficiency on risk.

The reports aim to demonstrate the feasibility and benefits of banks financing energy efficiency improvements of the EU’s building stock, which is responsible for over a third of the EU’s carbon emissions. As mortgages account for around a third of the total assets of the European banking sector - equivalent to half of the EU GDP (EUR 7 trillion at the end 2016) – banks can play a leadership role in the EU's ambitious climate and energy goals if mortgage lending recognises and rewards better energy performance.

EU support

The EeMAP Initiative - led by the European Mortgage Federation-European Covered Bond Council, Ca’ Foscari University of VeniceRICS, the Europe Regional Network of the World Green Building Council, E.ON and SAFE Goethe University Frankfurt - was backed with EU funding earlier this year. It aims to create an energy efficient mortgage through which homebuyers across the EU could be offered better interest rates or additional capital in return for purchasing more energy efficient homes or committing to energy saving renovation work. The cornerstone of the initiative is the belief that energy efficiency has a risk mitigation effect for banks as a result of its impact on a borrower’s ability to service their loan and on the value of the property; something a 2018 EeMAP pilot phase aims to prove.

The pilot phase will test the energy efficient mortgage product and its broader framework, and data will be collected and analysed. The goal of this endeavour is to illustrate how the current capital framework could take into account the potential risk mitigation effect of energy efficiency.

The EeMAP White Paper sets out the following key recommendations:

  • A simple and standardised framework for an energy efficient mortgage would help to pave the way to potential market entry, while a clear definition of an energy efficient mortgage would help banks to make a differentiation between energy efficient and conventional mortgages in their risk management processes, and in this way build datasets. 
  • Guidance to banks on how and what to instruct property valuers in relation to the energy performance of buildings would help to ensure that energy efficiency is appropriately taken account of in property valuations. 
  • Simple and proportionate energy efficiency measurement indicators would help banks to integrate energy efficiency into credit risk assessments.

Notes to editors

For more information about the EeMAP Initiative, please visit the EeMAP website: www.energyefficientmortgages.eu. In parallel to the EeMAP Initiative, the EU is examining how to integrate sustainability considerations into its financial policy framework in order to mobilise finance for sustainable growth. A High-Level Expert Group on Sustainable Finance is expected to publish recommendations later this year. 

Other key recommendations and findings from the EeMAP research include:

  • “Energy Performance Certificates” (EPCs) – which are required for both buildings that are built, sold or rented – could help underpin a European energy efficiency mortgage and improve mortgage affordability calculations. Research from the UK provides strong evidence for linking EPCs to borrowers’ household expenditure in mortgage affordability calculations, justifying around £4,000 of additional borrowing on a standard energy renovation. 
  • Market participants have begun to recognise that properties which are below average in their energy efficiency may suffer value erosion as the market and government policy starts to push the need for more efficient buildings. Similarly, those with very efficient ratings, which may in turn be also better maintained buildings, may sell or rent at a slight premium. 
  • Energy efficient mortgages can make a crucial contribution to the realisation of the Capital Markets Union (CMU) and also enhance banks’ ability to manage their mortgage portfolios through greater transparency and data analysis. This can help them to better identify and address non-performing loans and prepare for the long-term risk which climate change poses for financial markets, in this way reinforcing financial stability.

* This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 746205. The sole responsibility for the content of this material lies with the authors. It does not necessarily represent the views of the European Union, and neither EASME nor the European Commission are responsible for any use of this material.