Financing homes fit for the future

Your home has a role to play in tackling climate change. Forty per cent of greenhouse gas emissions come from the built environment, and while the worst offenders may be large office buildings, changing people’s homes can make a vital contribution to lowering energy demand, reducing carbon emissions and leading the clean energy transition.

In March 2023, the European Parliament approved the Energy Performance of Buildings Directive, which is intended to bring about the renovation of 35 million buildings by 2030. In legislation transposing the EU directive into national law, Luxembourg has introduced a variety of incentives for the construction of more energy-efficient homes or the upgrading of existing ones under the country’s National Energy and Climate Plan (PNEC).

The Directive requires all new buildings to be zero-emission from 2028, while existing ones must be retrofitted if necessary to comply at least with energy class E by 2030 and class D by 2033. The government is urging action now while the incentives are in place, since the requirements may become compulsory in the future.

According to the directive’s proposal, “a zero-emission building is defined as a building with a very high energy performance, with the very low amount of energy still required fully covered by energy from renewable sources and without on-site carbon emissions from fossil fuels.”

The impact of relatively small changes can be highly significant. According to Energy Saving Trust in the UK, the installation of a single home solar photovoltaic system can save as much as a tonne of carbon dioxide emissions a year in Northern European latitudes, depending on where you live – the sunnier, the better.

Well-insulated, energy-efficient homes can reduce energy consumption. More energy-efficient homes offer greater comfort thanks to better insulation, as well as having a smaller environmental footprint; they also offer lower energy bills, and increasingly command a premium over those with higher emissions.

For landlords, the shift is even more important, since various countries now refuse to license the renting of properties that fail to meet minimum environmental standards. Under France’s 2021 Climate and Resilience legislation, homes receiving a low score energy performance score will be progressively shut out of the rental market. Luxembourg is examining similar measures.

Upfront cost, long-term return

However, homeowners need incentives. While there may be longer-term benefits to possessing more efficient homes in the form of lower energy bills, there is a significant upfront cost. Prices of home insulation and renewable power generation have been going down, particularly in markets such as solar panels since 2009, but such work still represents a significant capital outlay, with the return realised only gradually over many years.

The need for homeowners to raise finance for green projects has intersected with the need for banks to demonstrate an improved carbon footprint.

However, the need for homeowners to raise finance for green projects has intersected with the need for banks to demonstrate an improved carbon footprint. Thus, businesses and consumers may prefer to do business with institutions that are clearly committed to the energy transition.

More and more banks are keen to show they are taking steps to decarbonise their portfolio of residential property lending. Encouraging homeowners to improve their existing homes or move to smaller carbon footprint housing can burnish institutions’ green credentials. The result is the rise of green lending.

What is green lending?

Green loans come in a variety of forms. They may be used to buy an energy-efficient home, undertake diagnostic work for an existing home, and to undertake the required retrofitting. They often sit alongside national government and EU-wide schemes to improve the efficiency of the housing stock.

This kind of credit is available to the owner or purchaser of a home – and in some cases even to tenants. In cases involving renovation, the rules are often relatively restrictive. They are likely to require money to be spent on specific energy-saving technologies, and the work to be undertaken by certified contractors. You will need to take out insurance for the work, which must be certified by an independent expert in order to benefit from the Klimabonus programme and its subsidy scheme (as explained below).

Green loans also entail all the usual requirements for salary details, bank statements, employment contracts and credit checks. Today most banks are starting to incorporate environmental and climate considerations into their lending decisions, which can have an impact on the level of interest rate offered; less efficient homes are likely to be subject to higher rates.

Most banks are starting to incorporate environmental and climate considerations into their lending decisions, which can have an impact on the level of interest rate offered.

Green mortgage loans

A number of lenders now offer lower interest rate on borrowers’ mortgage loans if the property they are living in has a higher energy performance rating. These offers will usually be available to homebuyers, and in some cases to those taking out new home loans.

Sometimes the two can be combined – extra cash may be made available to borrowers that make improvements within a certain time period. Banks may also offer preferential loans at lower rates of interest to mortgage borrowers making improvements to boost their homes’ energy efficiency.

There are significant incentives for banks to offer these sweeteners to their customers. Energy-efficient properties may be less risky as an investment and retain their value better, especially because they may be better placed to comply with stricter climate-related legislation that could be introduced in the future. And if homeowners are spending less on their energy consumption, this should boost their ability to meet home loan repayments.

Improving your existing home

Before taking on loans, it is worth seeing what is available for free. An increasing number of programmes have been established across the EU to provide financial assistance to homeowners who want to upgrade the insulation of their homes, change their heating systems to more efficient models, or switch to clean energy such as solar panels or heat pumps.

Luxembourg’s Klimabonus programme – similar schemes exist in other EU countries – is funded by money raised from carbon pricing. In Luxembourg, subsidies are provided by the Environment Agency and support renovation projects and new buildings involving the installation of solar heating and electricity generation systems, heat pumps or hybrid systems, wood-fuelled boilers and particulate filters. They are also available for the implementation of a heating network or connection to one.

Banks will in some cases pre-finance subsidies from the Klimabonus programme, although customers have to be careful how they undertake their building work to ensure it will meet the scheme’s criteria. Luxembourg, among other countries, offers a substantial VAT discount – a reduction from 16% to 3% – on almost all energy-saving renovation work, including the installation of solar panels.

Homeowners need to be aware that there are a wide range of incentives for them to make energy-efficiency improvements to their homes, and that they can be rewarded with lower energy costs. It can be a relatively easy way to partake in reducing their emissions and contribute to efforts against global warming.

Energy-efficient homes increasingly command a premium over those with higher emissions, while some countries now refuse to license rental properties that fail to meet environmental standards.