Personal Finance: Green light for cut-price loans

EACH year, the average household wastes pounds 278 on energy, according to The Energy Saving Trust. This is a significant dent in homeowners' pockets and, as the number of households is set to rise by more than 4 million in the next 20 years, it is also an environmental issue.

Poorly insulated loft spaces, badly fitting doors and windows and unlagged pipes and tanks use too much energy. So do inefficient and poorly maintained boilers and domestic appliances, although we also waste energy by leaving lights on and TV sets on standby.

Until recently, there were relatively few upfront incentives for home owners to make their properties more energy-efficient. Some local authorities do give insulation grants, but most help has to be aimed at either council tenants or the elderly. And although some energy-saving measures such as draught-proofing are easy and cheap, others are skilled jobs with very long payback periods. The classic example is double glazing: many householders who fit new windows will not recoup their investment before they move home.

Mortgage lenders, though, are beginning to recognise a niche in the market for "green" products which reward energy-conscious home owners. Lenders such as the Ecology Building Society have been financing energy-efficient homes since 1981; recently the Ecology granted its first mortgages for three "earth-sheltered" homes in Southwell, Nottinghamshire.

Owners of more conventional properties can turn to mainstream banks and building societies such as the Woolwich and the Norwich & Peterborough. Both lenders have recently introduced mortgages which go some way to offsetting the cost of making a home more energy efficient.

The N&P, for example, operates two schemes, one for new homes including self-build properties, and the other for existing homes. For new homes, N&P gives a 2 per cent discount off its standard variable rate for two years, as long as the property reaches an energy-efficiency (SAP) rating of at least 80 per cent.

For existing properties or re-mortgages, the discount is 1 per cent. The package includes a free energy survey, and pounds 1,000 cash back. The cash has to be spent on energy-efficiency measures, such as insulation, replacement windows or a new, power-efficient boiler. Home owners can either carry out the work themselves or hire a contractor. The N&P lets buyers borrow slightly more - 3.25 times the main income or 2.6 times joint income - reflecting the savings from living in a more energy-efficient home.

The Woolwich's Energy Saver mortgage is a fixed-rate deal. The interest rate is currently 6.95 per cent for five years. The bank also gives each buyer a choice of energy-saving household appliances. The Woolwich estimates that the appliances are worth at least pounds 1,100.

The Woolwich points out that energy-efficient lighting and appliances can save as much as 25 per cent on annual fuel bills. If every household switched to energy-efficient appliances, nationally the savings would come to pounds 1.8bn. Cost, though, is one barrier. The most energy-efficient appliances are usually the more expensive models.

The Alliance & Leicester has a home loan that does away with energy bills altogether. Its Free Energy mortgage is currently on offer to house buyers in London, through an arrangement with London Electricity.

Under the terms of the offer, households receive both their electricity and gas from London Electricity. The Alliance & Leicester will pay the bills for up to three years of "normal use". To qualify, home buyers have to borrow at least pounds 50,000. The mortgage offers a 1 per cent discount off the standard variable rate for three years.

According to A&L, energy bills are often a household's greatest worry after covering mortgage expenses, not least because bills are variable. The lender expects the package to appeal to first-time buyers or to young families; if a partner takes time off work to care for children, not having to pay energy bills removes one financial burden.

Savings should amount to several hundred pounds a year, although the offer has restrictions. The lender's literature does not define "normal use"; it is determined by London Electricity. The mortgage is not available on homes with swimming pools, built-in air conditioning, or houses with stables. Rental properties are excluded, too.

You will not get a free energy mortgage on a property which is used for business. This should not exclude people who do some work from home in the study or a loft conversion.

"If your home is your business, such as a bed and breakfast, it is excluded," says Tim Pile, marketing director at A&L.

The Alliance & Leicester mortgage has been criticised by environmental groups for encouraging energy use rather than saving energy. Mr Pile says A&L will give borrowers an energy-efficiency pack, and it is looking at deals on energy-efficient appliances. "We are concerned not to encourage people to be profligate."

Borrowers attracted by energy-saving loans still need to make sure that the mortgage deal itself is competitive. Ray Boulger, of mortgage broker John Charcol, says: "The Ecology Building Society is offering something different, for example if you want to buy a property that is not habitable." For more standard properties, there are cheaper packages on the market. "The key thing with all these mortgages is to look at what they offer, and what you can get from another deal," he advises. Home owners might be better off picking the best mortgage deal, and taking energy-saving measures separately.

Contacts: Alliance & Leicester, 0845 303 3000; Ecology Building Society, 0345 697758; Norwich & Peterborough, 01733 372006; Woolwich, 0181-298 5000; Energy Efficiency Hotline, 0345 277200.