It’s been years since green loans burst upon the scene, promising to offer borrowers a sustainable alternative when funding a home or investment.
But in an inflationary environment fuelled by rising interest rates and resulting in mortgage stress for hundreds of thousands of borrowers, is the demand still there for green loans?
“It’s an extremely tough market to be pushing sustainable green loans if there isn’t a clear financial benefit to the customer,” said Vincent Turner (pictured above), founder of online mortgage broker UNO Home Loans.
Competing values
Sustainability is still a priority for 30% of consumers, according to the Equifax Mortgage Broker Pulse Survey 2023, but only 4% of brokers would have placed green loans at the top of their lists when considering what their customers want.
While this may point to a disconnect between brokers and their customers, Turner said that sustainability was only one of many competing interests that were important to a homebuyer.
“I think that 30% would represent someone saying, ‘hey, what's important to you? Sustainability?’ And they would respond saying, ‘yeah that’s important to me’. But it’s alongside the other things that are important to them, which is outcome, money, and borrowing power,” said Turner.
“Very rarely are customers saying that they’re prepared to pay over and above the odds to achieve a green outcome.”
Turner said brokers typically saw customers expressing their interest in sustainable products, rather than brokers actively searching for sustainable loans for every customer.
“That’s absolutely something brokers could be doing, but by the same token, there's not a huge amount of lenders who are coming out with a game-changing, compelling option to drive sustainability,” he said.
Part of the problem, said Turner, was that borrowers were not being presented with two equivalent options to choose from.
This led to UNO Home Loans partnering with sustainability fintech Acacia Money, which assesses Australia’s mortgage lenders based on their commitments to net zero and revenue earned from lending to fossil fuel-intensive industries.
By integrating sustainability measures into the UNO platform, borrowers can easily identify available green-friendly options and choose the one that aligns with their values, provided they are equivalent in other aspects.
But Turner said that solved only a small part of the current issue.
“How are we going to get customers to say ‘hey, I will actively go and choose out one that's more sustainable at the expense of my own back pocket’?”
Who should lead the way on green lending?
Australian homeowners are currently doing it tough. Research commissioned by Aussie found almost 23% of homebuyers are using more than half of their income to pay their mortgage, while one in 10 are using more than 70% of their total income to pay their monthly home loan.
With thousands facing cost-of-living pressure and rolling off rates that have tripled since they were fixed, Turner said the idea that they would pay even more for a sustainable alternative “isn’t even an option for most”.
However, conditions do change, and Turner said lenders should be ready with viable products for when it does change.
“In the developed world, people who seek sustainable options are generally willing to pay a bit more for them. In most markets, the onus is on manufacturers to build that sustainable product and make it compelling enough for people to buy it,” Turner said.
Turner pointed to the electric vehicle market as an example. After entering the Australian market in 2011 with price tags above $100,000, it took seven years for 5,000 electric cars to be on the road. In February alone this year, nearly 6,000 sold in a month despite the current economic challenges.
“Now you can buy an electric car for just slightly more than a petrol version. It’s compelling now because the cheaper running costs and the fact that it aligns with people’s values outweighs the slight price bump,” Turner said.
“We are yet to see that in green loans. A lot of green loans are good – a step in the right direction – but in the grand scheme of a person’s finances, I think they are fairly limited. There aren’t many massively compelling sustainable loans in the market.”
Rethinking green loans
In order for green loans to be an effective product in the market, Turner said they needed to be compelling to a lot of borrowers.
Instead, green loans often have exclusive requirements, such as needing a seven-star rating to qualify for a cheaper rate. This means that someone who simply wants to improve their home may not be eligible.
In another scenario, if the homebuyer takes out a green loan, the lender might offer lower rates or a 12-month interest-free option, allowing them to have the funds for greener outcomes such as solar installation.
But, as Turner pointed out, customers could often get the same savings directly from solar installers foregoing the need to complicate their mortgage product.
“Another good example is that investors don't have really any motivation to put solar on the roof because they're not paying the energy bill, so why would they take out a $20,000 interest-free loan to put solar on so someone else can benefit?” Turner said.
While demand green loans have quietened off for now, Turner said it was the “perfect opportunity” for lenders to rethink and solve some of the challenges in the green loan market.
“Us brokers would absolutely sell those products, but it’s hard for brokers to be dictating product innovation to lenders,” Turner said. “It must be driven by lenders and then brokers will sell what's available and if the incentive is there, it will supply the demand.”
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