Can you beat rising interest rates with a green mortgage?

Homeowners, spoiled by years of rock bottom interest rates, suddenly have to struggle with more expensive money. The Bank of England’s key rate rose from 0.1% last December to 1.25% today, pushing mortgage rates higher. At the end of 2021, the average rate for a two-year fixed mortgage was 1.4%; that same mortgage now costs 3.74%, according to comparison site Moneyfacts. On a £200,000 mortgage, that’s a difference of £236 per month.

“Average mortgage rates are the highest we’ve seen since 2013,” Sarah Coles of Hargreaves Lansdown told The Telegraph. “A lot of people are going to have to spend more money.”

Should You Get a “Green Mortgage”?

One way to avoid high interest rates is to get a green mortgage. Although once a niche product, the number of green mortgages on the market grew by 18% in the six months to April, according to financial data provider Defaqto.

Green mortgages aim to reward people for having an energy-efficient home. You prove to the lender that your home has an Energy Performance Certificate (EPC) rating of A or B and you get either cash back or a better interest rate on your mortgage.

The potential for significant savings has prompted renewed interest in green mortgages. Research by financial advisors Twenty7Tec found that online searches for eco-loans have quadrupled since last year.

But don’t assume that a green mortgage will give you the best deal on the market. While interest rates tend to be lower than average, you can still beat the rate if you look at the best mortgage buys.

For instance, Virgin Money’s Greener Mortgage offers a fixed rate of 3.1% over two years. On a £200,000 mortgage this would save £828 a year, and £300 cash back is also on offer.

Virgin Money’s Greener Mortgage is competitive, but there are cheaper deals available. Progressive Building Society has a two-year no-fee fixed rate of 2.84%.

Other ways to save

There are other ways to mitigate the rate shock. Overpaying your mortgage while you still have a low rate can make sense – reducing your loan-to-value (LTV) ratio could push you into a lower LTV bracket, allowing you to receive lower rates.

Most mortgage lenders will allow you to overpay up to 10% per year, but check. Get it wrong and you could trigger a prepayment charge that negates any benefit of overpaying.

You can also extend the term of your mortgage. Although you may end up paying off five years longer than expected, this lowers your monthly payment. Plus, you can always shorten your mortgage term again when interest rates drop.

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