This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: Few consumers realize that a property's poor energy rating can directly affect 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 advisory firms, 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. The study is published in the Journal of European Real Estate Research. "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 notes that while the current focus is on energy performance, more favorable financing is likely to depend on a wider range of environmental sustainability criteria in the longer term. Energy performance certificates (EPCs) have existed in the EU since 2002. Yet they took on a central role in lending in 2020, when new EU Taxonomy rules came into play.
From then on, criteria for the "greenness" of buildings were largely based on their EPC rating—with banks relying on these criteria to make green lending decisions. The lower the energy rating, the more likely it is that 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, a doctoral researcher.
"Properties with a high energy rating that qualify for green lending may, in turn, receive somewhat more favorable 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 lenders' perceptions of the severity and importance of physical climate risks depend heavily on the geographical location of the asset and the region in which the bank operates. "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 severe flooding in Sweden, for example, has also raised awareness of these risks in the Nordic countries. "The building stock in the Nordics is comparatively energy-efficient and therefore less likely to be exposed to transition risks than that in other parts of Europe," she says. "However, physical climate risks may become more important in the near future." Another finding, according to Holopainen, is that despite the EU's ambitious renovation targets, the current financial system encourages banks to finance new properties rather than energy renovations.
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