Your home’s energy performance is already affecting your mortgage – soon climate risk will too

Few consumers realise that a property’s poor energy rating can directly impact their ability to obtain a mortgage. In the future, flood and other climate-related risks will also play a greater role in lending decisions.  

Aalto University researchers interviewed 25 green finance experts from major European banks and real estate advisories, finding that a high energy rating helps borrowers access green lending or other financial benefits, while a poor rating can make a property harder to finance.  

‘For people taking out a mortgage, or considering buying a home, it is important to understand that the environmental performance of the property already affects banks’ lending decisions and loan terms,’ says Seppo Junnila, Professor of Real Estate Economics at Aalto University. 

Junnila also flags that while at present the focus is on energy performance, in the longer term, more favourable financing is likely to depend on a wider range of environmental sustainability criteria. 

Lenders becoming more attuned to risk 

Energy Performance Certificates (EPCs) have existed in the EU since 2002. Yet they took on a very central role in lending from 2020, when new EU Taxonomy rules came into play.  From then on, criteria for the “greenness” of buildings were very much based on their EPC rating – with banks relying on these criteria to make green lending decisions. The lower the energy rating, the more likely the property will require significant energy renovations and other investments, and that its value will decline over time. 

‘In practice, a property with a very poor energy rating may not qualify for a loan at all, because banks may consider it too high-risk,’ says Maria Holopainen, Doctoral Researcher. ‘Properties with a high energy rating that qualify for green lending may, in turn, receive somewhat more favourable financing terms than conventional loans.’  

The researchers also found that banking experts expect climate risks such as floods, wildfires and other extreme weather events, to become the next major factor affecting the financing of homes and other properties. Yet, the lender's perception of the severity and importance of physical climate risks is very dependent on the geographical location of the asset, and the region the bank operates in. 

‘In southern Europe, climate risks – especially wildfires, heat waves and floods – already carry considerable weight, and there are concerns that they could create inequalities between different residential areas,’ says Holopainen. She adds that recent strong flooding in Sweden, for example, has also raised awareness of these risks the Nordic countries. 

‘The building stock in the Nordics is comparatively energy-efficient and therefore less likely to be exposed to transition risks than other parts of Europe,’ she says. ‘However, physical climate risks may become more important in the near future.’   

Financial system favours new construction over energy renovations 

Another interesting finding, according to Holopainen, is that despite the EU having ambitious renovation targets, the current financial system encourages banks to finance new properties rather than energy renovations. 

‘From a sustainability perspective, renovations are a far better option than new builds – in fact they are essential if we are to reach the agreed on climate targets and carbon neutrality by 2050,’ says Holopainen. ‘High-performing new buildings alone are not enough.’  

However, under the EU Taxonomy, it is easier for new properties to meet the criteria for being considered green, as they can achieve an A energy rating.  

‘This gives banks an advantage when raising their own financing in the market,’ she explains. ‘Financing renovations, on the other hand, is more risky for banks, and reporting such properties as green is also technically more challenging.’ 

Addressing this contradiction would require both stronger guidance and greater pressure from markets, investors and consumers, Holopainen says. 

Sustainable homes may become a privilege for the wealthy 

The study shows that the criteria for green lending are changing, but banks are responding to the changes more reactively than proactively.  

Banks see the current geopolitical situation and regulatory uncertainty in the EU – including uncertainty around the easing of sustainability reporting requirements – as obstacles to progress on sustainability in banking. 

Holopainen also sees a risk that expensive, energy-efficient and high-quality new homes will increasingly be bought by wealthy households and investors, while lower-quality and higher-risk properties are left to people who cannot afford more expensive homes. 

‘This would mean that people who are already in a stronger financial position would be the ones benefiting from more favourable financing,’ she says. ‘The question is how to ensure that people in more vulnerable financial positions can also access sustainable homes.’  

Read more about the study: 

• Is green the new normal? Understanding current sustainability practices in European residential property lending (Journal of European Real Estate Research)
• Net carbon positivity in European green real estate finance (Journal of European Real Estate Research)