Kick-starting mortgage financing of energy savings renovations

There is ample evidence that reducing energy use in the existing building stock has large environmental and economic benefits. Research by Copenhagen Economics suggests that the market value of buildings significantly increase following an energy renovation, providing collateral value for financing the up-front cost of the renovation. This makes mortgages an obvious solution to finance green renovations of the building stock.

However, we have noted three barriers preventing a mortgage-based solution:

• Energy efficiency assessment: There is a lack of a harmonised method to estimate it across EU countries.
• Funding structure: The degree to which an increase in the market value of a house can be used as collateral for a new house differ substantially across EU.
• Credit risk assessment at mortgage institutes: Many banks do not include the increase in collateral due to an increase in value of the house. This means that loans to green renovations de facto are treated as unsecure loans, giving rise to higher capital costs for banks and higher lending rates for consumers.

The potential to establish mortgages as a source of finance for green renovations differs widely between different countries. Consequently, to kick-start green mortgage finance, we suggest adopting a pragmatic country-by-country approach, to overcome the different country-specific barriers described above. This could be an important first step in order to achieve the long-term goal of a pan-European private bank financing mechanism.