Ethical Mortgages

In this guide, we look at how to choose an ethical mortgage and why building societies are better than banks.

We also explore whether mortgage lenders could do more to help address housing issues such as the urgent need to increase the poor energy efficiency performance of many UK houses.

Buying a home is the usually biggest single expenditure in life, requiring us to borrow large sums of money.

This creates a lucrative opportunity for the banking sector, the profits from which might end up invested in problematic industries such as fossil fuels or arms. You can read more about the big five banks and their controversial investments in our guide to current accounts.

The good news is that there are actually many ethical options to choose from when getting a mortgage, some of which are equally or more affordable than products from conventional banks.

Choosing an ethical mortgage provider

According to the Building Societies Association, building societies currently hold around a quarter of the total market share in mortgages. We hope to see an upward trend in this, as building societies consistently outperform banks when it comes to ethics. In our research all of the building societies scoring higher for ethics than any of the mainstream banks.

This is mainly because of the fact that they do not invest in the same way as banks. Regulations stipulate that at least 75% of a building society’s assets must be held in residential property mortgages, so they are much less likely to be lending to companies with dubious ethical records.

As far as we can tell, some may do a little lending to companies but almost always to smaller businesses to buy commercial buildings in their local areas.

Choosing a building society as your mortgage provider is the simplest way to ensure your mortgage is not supporting the worst activities of the financial sector. The great news is that they are also often cheaper than banks.

According to Which? a first time buyer with a small deposit is much more likely to get a good deal on a mortgage from a building society than a bank, and consumers will increasingly be seeing building society mortgages coming out at the top of the table on price comparison sites.

Building societies seem to be more ethical in more ways than just how they are regulated. None of them were marked down for tax avoidance and Nationwide is the only building society to lose marks for excessive director pay.

As our new tax column highlights, you are also much more likely to find high-risk company structures for the likely use of tax avoidance in the banking sector.

None of the building societies were marked down for poor tax conduct. On the other hand, only four banks – Kent Reliance, Metro Bank, Paragon, and Handelsbanken – did not lose marks under Tax Conduct. More information on these companies is included in our guide to ethical savings accounts.

Other ethical mortgage options

Building societies are seen as a more ethical option than banks due to the fact they lend mainly in the housing market rather than other more unethical sectors. You can read more about building societies in our guide to savings accounts. 

Building societies are also mutuals, which means legally they are owned and run for the benefit of their members, rather than shareholders. Not having to generate extra profit for shareholders also means building societies should be able to give customers better deals than banks do.

However, there have been criticisms that directors of many building societies are still helping themselves to large pay packets. Many are listed in our 2018 article on Director’s Pay. Only Nationwide paid its director over £1million, with a payment of £3.4m in 2016. It therefore got a mark in our Anti Social Finance category.

Many building societies ‘demutualised’ in the 1990’s, and become more like banks. Several former mutuals failed in the financial crisis, and others that were still mutual had to be taken over by other building societies or banks. They came unstuck due to excessively risky commercial and residential property lending funded by unstable wholesale funding, just as the banks did.

Luckily, restructuring after the credit crunch has forced building societies to focus again on the core functions that too many had forgotten; long-term stable deposit-taking and prudent, good-quality mortgage lending.

All the mutuals featured on our scoretable above pick up an additional mark in our scoring system for company ethos due to their more democratic structures. Mortgage customers are also members, and are able to vote to influence how the society is run. However, there has been criticism that in practice, they are not all as democratic as they could be.

According to the Building Societies Association themselves, “Several societies have introduced a “quick vote” option to their AGM voting form to make it easier for members. Here the member has to cross just one box, and the Board will be appointed to vote on the member’s behalf.”

Switching mortgages

If you already have a mortgage and want to switch to a more ethical option, then this is possible and could also save you money, even if it incurs some upfront costs such as having a property surveyed again.

Most mortgages come with a fixed-term period which fixes a low-interest rate for a number of years. It is generally recommended to remortgage when you reach the end of this period to avoid paying standard interest rates and this can be a great opportunity to switch to a more ethical provider as well.

Whether switching, or as a first time buyer, ordinary repayment mortgages are always best from an ethical point of view. Interest-only, or ‘endowment’ mortgages of which there has been much mis-selling in previous years and which rely on stock market investments, will always be problematic ethically – as well as riskier financially.

Mortgage brokers

Whether you are getting a new mortgage or just switching providers, navigating the world of interest rates, fixed-terms and repayment options can be a bit overwhelming – especially if you are also thinking about the ethics of your mortgage!

Mortgage brokers are essentially financial advisors and can help make the process of finding the right mortgage a lot simpler. They also manage the application process. You don’t have to use a mortgage broker, but they will generally have access to mortgage offers not available directly to consumers.

There are a huge number of brokers in the UK and there are also multiple mortgage broker directories listing them, so it was not within the scope of this guide to rate them or provide recommendations on that basis.

Some do appear to specialise in ethical finance or green mortgage options although you may have to pay for these services.

There are plenty of free services available though, the largest of these in the UK is a company called London & Country. The Money Saving Expert website also lists Habito, Trinity Financial, and Trussle as major UK brokers and suggests using unbiased.co.uk to find local brokers.

While they might not be specialists in ethical products it will be perfectly fine for you to let whatever mortgage broker you choose know that you only want to see mortgages from building societies or just compare the list they provide to you with our score table yourself!

Green mortgages

‘Green mortgages’ have lower interest rates or other preferable terms, which are only available to those buying energy efficient homes or committing to improving the energy efficiency of a home.

In theory, this will encourage buyers, sellers and home builders to be paying more attention to the energy performance of homes and help ensure that our existing housing gets brought up to the standards needed to meet global carbon reduction agreements.

Who offers what

These products are still relatively new and we hope to be seeing more providers starting to explore how they can reduce the climate impact of their investments through green mortgages. Only four of the companies in this guide appear to be offering a green mortgage product:

The Ecology Building Society provides mortgages which promote sustainable housing and communities. This can be for self-build energy-efficient housing, ecological renovation, improvements or conversion, or small-scale and ecological enterprises. It also offers mortgages for boat moorings, woodlands, and shared ownership housing.

Its innovative C-Change scheme offers homeowners discounted mortgage rates for energy-efficient homes that fit the criteria above. There are four levels of discount on a standard variable mortgage ranging from 0.25% to 1.25%.

The level of discount offered depends on the energy standard of the home, so the more energy-efficient the home is, the bigger the saving you can make on your mortgage.

Saffron Building Society offers borrowers a 0.1% interest rate reduction with its new Retro-Fit mortgage if borrowers can show they have made changes that improve the EPC rating by one band to at least an E (so those with a band G will have to improve by two bands).

Nationwide’s Green Additional Borrowing offers a 0.69% reduction off normal interest rates if 50% of the loan is used to make your home more sustainable.

This includes the following measures: “air source heat pump, cavity wall insulation, double glazing/replacement windows, electric car charging point, ground source heat pumps, loft insulation, small scale wind turbine, tanks and pipes insulation”.

They do not appear to require evidence of how much measures improved efficiency. This product is only available if you have your main mortgage with Nationwide.

Barclays Green Home Mortgage offers lower interest rates on mortgages for people buying a new property with band A or B energy rating or above 81. The property has to be bought from one of Barclays' partner house building companies.

While the availability of green mortgages is still fairly limited there are signs that other mortgage lenders are also starting to pay more attention to the Energy Performance Rating of their portfolios.

For example, West Bromwich Building Society stated that it had done “considerable work to understand the environmental impact of our Investment Property subsidiary West Bromwich Homes Limited, with action being taken to ensure the portfolio meets the newly introduced EPC standards”.

NatWest stated “We will support customers in the UK & Republic of Ireland who have mortgages with us to become more energy efficient. Our aim is to have 50% of the mortgages we provide at or above Energy Performance Certificate (EPC) rating C or equivalent by 2030”.

However, it appeared that NatWest’s activities around this were largely focused on sharing energy efficiency advice and links to government funding with its customers rather than providing actual funding.

Is a green mortgage an ethical mortgage?

What is important to remember here is that the ‘green’ in a green mortgage is linked to your actions, not those of your lender. It is the house you are choosing to buy that has the reduced environmental impact.

The profit made on your mortgage by the lender could still end up invested in any number of environmentally harmful activities. For example, Barclays offers a green mortgage but loses marks under Climate Change, Pollution and Toxics, Habitats and Resources and Palm Oil.

A green mortgage does not necessarily equate to an environmentally ethical mortgage.

Unfortunately, reduced interest rates represent much less of an incentive when interest rates are low, and the global pandemic has been causing interest rates to plummet. If you are buying an energy-efficient house at the moment, it will not cost you much more, and in many cases could still cost you less, to get a regular mortgage with a more ethical lender than a green mortgage from a company like Barclays.

The financial argument for offering a green mortgage

Until you have finished paying off your mortgage, your house acts as an assurance on the money you borrowed. If you stop being able to pay your mortgage the lender can repossess the house in order to recuperate costs.

Mortgage lenders therefore rely on the housing they have lent on to maintain its value. The increasing urgency of the climate crisis along with rising energy bills will likely mean energy efficiency will be on the minds of more and more buyers and houses falling short will decrease in value and become harder to sell.

So, if preventing catastrophic climate breakdown isn’t enough of an incentive in and of itself then perhaps the potential financial risk of being left with a portfolio of inefficient housing is enough to get mortgage lenders to act.

While there might not seem too many options available right now, we would expect the green mortgage market to have rapid growth. The more green mortgage offers that become available, the bigger the disparity between the value of a high EPC band house and a low EPC band house. This will hopefully encourage mortgage lenders to offer more products to people who already own inefficient housing to help them improve their rating.

Lower heating bills should also mean people find mortgage payments more affordable. On the other hand, considering how we got into this situation, it does not seem wise to rely too heavily on the market economy for climate solutions.

Any actions by mortgage lenders need to be backed up by government regulation for new builds, and government funding for improving existing housing – particularly to support people on a low-income to ensure they do not bear the brunt of low EPC band devaluation.

Credit Union Mortgages

Credit unions are co-operatives which provide accounts, loans and a range of services to their members. Like building societies, they are mutuals owned and controlled by the members, not by external shareholders pushing for maximised profits. They are also not-for-profits so represent a good ethical option.

Some credit unions also offer mortgages, but this is mainly in Scotland so is not necessarily a widely available choice in the UK. For example, to apply for a Glasgow Credit Union mortgage you must be a member and live or work in the Glasgow postcode.

As these products are not widely available to all UK consumers we have not included them in our guide but it could be worth looking into whether there is a credit union in your area that offers mortgages because they are another good alternative to a bank.

Read more about saving with credit unions.

Islamic mortgages

A key principle of Islamic finance is that money should have no intrinsic value. This means that earning or paying interest is forbidden. Therefore, for a financial product to be considered halal, there can be no payment of interest by either party involved in the transaction.

There are a few different types of Islamic mortgage but the most common is the Home Purchase Plan (HPP).

With an HPP product the consumer purchases a certain percentage of the house and the mortgage provider purchases the remaining percentage. The consumer then pays rent on this percentage which also contributes to the gradual buying of the whole property from the mortgage provider. As the money is made through rent rather than interest this is seen as permissible and halal by many Muslims.

When it comes to Islamic mortgages there are not a huge amount of options available in the UK. HSBC and Lloyds stopped offering Islamic finance products, so they are now only really available from specialist providers.Two of the main providers are included on our score table, Al Rayan and Gatehouse Bank.

Charles Haresnape, of Gatehouse, said:

“We believe that Sharia finance, regardless of religion, is ethical finance. People want a good deal but they want to know it is ethical. We will not finance the arms trade, gambling or alcohol. No major banks can give those assurances. Young people are very conscious of these issues.”

Although neither have a policy to avoid investing in fossil fuels, it does look like the two providers of Islamic mortgages on our table, while not as high scoring as any of the building societies, do considerably better than the mainstream banks.

How has COVID affected mortgages?

COVID-19 has had a knock-on effect on the mortgage sector and on consumers looking to get a mortgage.

Before the lockdown it was very common for mortgage lenders to provide 90-95% of the cost of a property.

Now, economic uncertainty, lack of job security and talk of a housing market crash means that buyers who were planning to purchase a property with a 5% deposit have suddenly found they need to come up with significantly more cash, even if they had an ‘agreement in principle’ beforehand.

The lockdown also saw millions of workers put on furlough with 80% of their wage paid by the government. Many lenders decided not to acknowledge this as income in mortgage assessments, others required furloughed workers to have a return-to-work date or a deposit above a certain percentage. It also affected furloughed workers’ ability to switch mortgage providers.

The government could have chosen to support first-time buyers locked out of a housing market that is already inaccessible to so many. Instead, the government decided to stimulate the housing market with a stamp duty holiday.

This serves to benefit anyone buying property, including second homes and buy-to-let properties. The only group it doesn’t benefit, and arguably may actually disadvantage, is first time buyers purchasing property under £500,000 (as they were already exempt).