How Banks Make Money on Energy-Efficiency Loans
Do you want to install solar panels in your home? Would you upgrade to all energy efficient windows and doors if you could afford it? With new trends in mortgage and construction project financing, you may be able to get those loans. Though mortgage and commercial building lending still has not returned to pre-2008 levels, banks and other financial institutions are interested in making money on the mortgages that they can complete. A couple of new studies make the energy efficient loan a potential moneymaker for banks.
Though few people know it, one of the factors in calculating whether someone can get a mortgage is including the operating and maintenance costs of the purchase. Most banks calculate this number at 2-3 percent, so someone purchasing a home for $200,000 is expected to pay $4,000-$6,000 annually on operating and maintaining this home. When lenders calculate a “mortgage lending limit,” which is the maximum mortgage that the lender will finance, this cost is calculated into the rate.
Some green industry experts argue that lenders who finance energy-efficiency improvements can decrease this expected cost if the person is making energy efficient improvements. For example, the person buying this $200,000 home may want to do major energy retrofits costing $20,000. If the operating cost decreases by 1 percent, or $2,000 per year, the home now costs $2,000 to $4,000 annually in maintenance. The $20,000 energy efficiency improvement pays for itself in 10 years ($20,000 improvement divided by $2,000 annual savings). Thus, the bank can loan the person $220,000 instead of $200,000, which will yield a greater return for the bank over the life of the mortgage.
How do banks know if the energy efficiency improvements will matter? In other words, how can a lender know that the loan is worth making?
That question has plagued the real estate financing industry for quite a while. Some industry professionals argued that there is no definitive way to know about the decrease in maintenance costs. According to this viewpoint, making the higher loan on the hope that the homeowner can afford it makes little sense. FHA, the Federal Housing Administration, helped this process along by approving special limits and guaranteed financing for EEM or EIM homes. EEM, or Energy Efficient Mortgages, are for homes that already meet federal Energy Star ® guidelines while EIM (Energy Improvement Mortgages) are for people who want to make energy efficient improvements to a home. With these guarantees, more bankers are lowering the operating and maintenance estimate for mortgages.
In early January 2012, the Deutsche Bank released its findings showing that almost all energy efficiency improvements pay for themselves over the course of a 30-year loan. Groups like the American Council for an Energy-Efficient Economy are using this study to demonstrate to lenders that research is on the side of lowering operation estimates. In fact, recent reports show that major improvements, such as adding energy-efficient roofs, result in significant building maintenance costs for apartment complexes as well as for single-family mortgages. These types of findings may result in more lenders re-evaluating their mortgage limit calculations.
