What are Energy Efficient Mortgages

The theory behind energy efficient mortgages posits that homes with superior energy performance—typically measured through high EPC ratings—are associated with lower probability of default (PD) and potentially lower loss given default (LGD). This stems from the following rationale:

• Lower energy costs improve a borrower’s disposable income and debt service capacity.

• Better-performing buildings may be more resilient to regulatory or market shocks (e.g., rising energy prices or green policy costs), preserving asset value.

• In case of foreclosure, higher-value, energy-efficient properties may retain their market value better, reducing LGD.

In addition to the energy performance of the individual building, climate-related risks—including exposure to physical climate hazards such as flooding or extreme weather—are an important consideration in assessing mortgage risk. Evaluating climate risk at the portfolio and geographic level complements building-level energy assessments and supports more comprehensive risk management.

Scientific evidence supporting this risk hypothesis is slowly emerging. Empirical studies by institutions such as the University of Venice and Tilburg University⁶ suggest a statistically significant correlation between energy performance and mortgage default rates or loan performance. These findings gradually reinforce the conceptual link between energy efficiency and credit risk, and they are expected to inform future supervisory expectations and possibly prudential treatment.

 

 

These mortgage products play an increasingly relevant role within the European Union’s sustainability policy framework. They directly support the objectives of the European Green Deal, the Renovation Wave¹, and national climate policies such as the Dutch Klimaatakkoord². These initiatives all aim to decarbonise the building stock—responsible for approximately 36% of greenhouse gas emissions and 40% of energy consumption in the EU³. In regulatory terms, energy efficient mortgages are gaining significance within the context of the EU Taxonomy for Sustainable Activities⁴ and the recast Energy Performance of Buildings Directive (EPBD IV)⁵, both of which promote higher energy standards for new construction and deep renovation. Under EPBD IV, all buildings in the EU must achieve zero-emission status by 2050 at the latest, setting a clear long-term decarbonisation trajectory for the built environment.

 

The integration of building-level energy data is essential to support the credibility and scalability of energy efficient mortgages. Embedding this information into loan-level disclosures allows investors, supervisors, and credit rating agencies to verify environmental performance and assess risk.

 

Energy efficient mortgages often serve as underlying assets for green covered bonds and ABS, improving access to sustainable finance markets.In practice, many lenders now offer favourable loan conditions for borrowers purchasing or upgrading energy-efficient properties. These may include lower interest rates or  higher loan-to-value (LTV) ratios

The rationale is that the assumed lower risk profile of such mortgages justifies enhanced lending terms. These borrower incentives are not only commercially viable but also serve as a policy lever to encourage energy renovations at scale, thereby supporting national and EU-level decarbonisation targets.

 

As both a financial product and a policy tool, they hold substantial promise for advancing the EU’s transition to a low-carbon, climate-resilient built environment.