Bank of England study finds green mortgages offer discounts
A Bank of England working paper reveals that green mortgages in the UK offer pricing discounts for energy-efficient properties. Lenders began offering these discounts in 2018, reaching up to 15 basis points by 2022.
Energy efficiency gains value
The study, conducted by Mahmoud Fatouh, Benjamin Guin, and Haluk Unal, delves into product innovation within the UK mortgage market.
It specifically investigates how attributes beyond traditional contract structures, such as energy efficiency, influence pricing.
The researchers developed a sophisticated framework that models mortgage products as structured bundles of attributes, focusing on the two-part tariff system of interest rates and fees.
This framework allows them to infer innovation by analyzing pricing patterns over time.
Their empirical strategy meticulously uses transaction-level data, exploiting variations within products to pinpoint when new features begin to impact pricing.
This rigorous approach was then applied to the specific case of green mortgages, providing a detailed understanding of their emergence and market integration.
Green discounts take hold
The study demonstrates that Energy Performance Certificates (EPCs) became pricing-relevant in the UK mortgage market from 2018.
Lenders began offering discounts for properties with higher energy efficiency ratings.
Analysis of offer-level data on advertised green products precisely estimated these 'green discounts,' which reached up to 15 basis points by 2022.
This trend signifies a clear market response to environmental considerations.
Mortgages for high EPC properties are largely concentrated in new constructions, suggesting relaxed credit constraints and increased housing investment, with broader positive implications for the UK economy.
Green finance gains traction
This research provides crucial empirical evidence for the growing importance of environmental factors in financial markets.
While focused on the UK, its findings suggest a broader trend towards incentivizing sustainable investments through pricing mechanisms.
Policymakers should consider these market-driven signals when designing future green finance initiatives.