Lending regulations need to be modified to finance household electrification and ‘green retrofits’ at scale

To reach net zero by 2050, the Institute for Sustainable Futures (ISF) at the University of Technology, estimates 7 million existing Australian homes will need to undertake energy efficiency and electrification upgrades.

These are the homes that won't be subject to the new construction codes that have higher efficiency codes, which will take effect in May 2024.

But with many households facing increasing financial strain, the biggest stumbling block for retrofitting existing homes to make them energy efficient and all-electric is the upfront cost – many people just can’t afford a ‘green retrofit’.

Governments currently provide some financial incentives and rebates to electrify efficiently, but the ISF says the energy transition won’t just be financed by government grants given tightening government budgets.

In a new report, and in their submission to the Senate Inquiry on Residential Electrification, the ISF argues that finance must be made more easily accessible to enable efficient electrification and green retrofits.

They say this can best be done using the most cost-effective loan product on the market - the housing loan.

Gordon Noble, research director at ISF, told the SwitchedOn podcast that banks and lenders can increase a housing loan for relatively small amounts of money, up to $5,000, which owners would repay over the course of the loan.

“The reason is because it's secured by our houses, and therefore it's got the lowest interest rate,” says Gordon Noble. “It's also got the longest term to repay the loan.”

The thinking behind the mortgage add-ons is that by making these sort of investments in their home, a household’s budget will be better off.

Climate Council analysis estimates that an average Australian household can save between $1085 and $2,872 each year, depending on the state or territory, by undertaking both electrification and efficiency upgrades.

“From a bank perspective, what that means is because they've got more disposable income, [homeowners have] got the ability to service a very small increase in their loan. And their actual credit risk for the bank is improved because you've actually improved the households budget position.”

This means the term of a housing loan would not need to be extended.

The problem though with rolling out mortgage add-ons for green retrofits at scale, is that the strict regulations which govern Australian lenders prevents them from automatically increasing a person’s home loan. Homeowners currently must reapply for their loan to increase their loans by even a small amount.

“Take out some of the difficulties that banks have to just automatically increase a loan, then what we can do is unlock that finance door for basically all of us,” says Noble.

Some lenders already provide innovative ‘green finance’ options. For instance, Bank of Australia has the option to pause housing loan repayments while owners undertake a green retrofit, and Commbank offers a reduced interest rate to install eligible clean energy products.

But if banks are to provide mortgage add-ons without homeowners having to reapply for their loan, and this type of financing is to be rolled out at scale, it will require the Australian Prudential Regulation Authority (APRA) to issue prudential guidance to banks.

And whilst lenders are already providing innovative finance options for the middle and upper end of the market, Noble says “we have however yet to see [lending] innovations that are targeting the 766,220 loans that are in the lowest loan repayment quartile group of housing loans.”

Noble believes that the housing stock purchased by low-income earners will proportionately have the biggest benefit from mortgage add-ons.

“If you look at the lower end of the housing market, the ones that need the retrofits the most, they were built in an era where they were reliant on gas, and a lot of the fittings and appliances need to be refreshed.”

Without more options like this for financing for lower income earners, Noble fears many households will get left behind in the energy transition.

“With energy prices spiking, if a household is not able to make energy efficiency investments to their homes that help to reduce their energy bills, there is a danger that households would be exposed to what we describe as a “net zero poverty premium.”

By this, Noble means it costs more to be poor.

"What we don't want to see is all the innovations around the transition to net zero are things that benefit middle and upper income earners but not low income earners."

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You can hear the full interview with Gordon Noble on the SwitchedOn Australia podcast here.