For homeowners making a decision about how to finance a home purchase, options are relatively consistent regardless of where you live. Mortgages rates and terms are comparable across markets and more dependent on your own personal preferences than location—making a potential home buyer’s financing decision much more straightforward.
But decisions about how to finance a home energy upgrade are far more complex. Loan options vary depending on the state (and even municipality) in which you live, and financing packages come with a huge variety of different terms, rates, and origination requirements. This complexity can dissuade even the most motivated homeowners trying to make sense of the dollars and cents around an investment. It can prevent them from pursuing upgrades such as improvements to the building envelope, major home system replacements, or the purchase of on-site renewable generation like solar photovoltaic (PV)—improvements that can vastly improve their home’s’ comfort, safety, value, and energy performance.
Rocky Mountain Institute’s (RMI) latest insight brief, How to Scale Home Energy Financing Products, details these and other barriers that lead to a gap between demand for and actual implementation of home energy upgrades. Simply put, mainstream home lending products and processes have yet to fully take into account the value of home energy improvements. And even when they do, securing financing can be an arduous, sometimes insurmountable, hurdle for a homeowner.
The good news is that there are signals that the home energy improvement financing market is quickly evolving in a positive direction, providing a new suite of options to a more diverse set of customers, while also stripping out complexities that have prevented home energy efficiency financing products from scaling more broadly. The insight brief surveys the current landscape to offer a set of factors traditional and nontraditional lenders can consider for expanding financing options that are attractive and relevant to homeowners.
Actions that lenders can consider include:
Elevating current product offerings by driving consumer awareness and lowering complexity.
A set of home energy financing product offerings is available from traditional lending institutions, yet consumers are not demanding these products. This is at once the real barrier to their use and the issue most easily addressed by the market. RMI believes these low adoption rates can be attributed to three key factors: (1) the lack of a dedicated product sales force within the traditional home lending industry; (2) low consumer awareness of these products; and (3) underwriting complexity. In order to empower homeowners to make more home energy improvements, traditional lenders must be given the tools to sell such products using conventional automated underwriting systems.
Taking advantage of a homeowner’s timing and trigger points for energy upgrade decisions.
A study from the National Association of Realtors found that more than half of homebuyers take on a home improvement project within the first three months of buying a home, spending an average of about $5,000. Although to date, the majority of these improvements are cosmetic (e.g., renovating a kitchen or bathroom), this shows that a home purchase is a trigger point ripe with opportunity to offer financing options that not only cover but also incentivize energy performance improvements. In addition, home energy upgrades are most often pursued when a homeowner experiences a failure of major equipment, such as a boiler or HVAC system that needs immediate replacement. To take advantage of this trigger point requires minimizing the complexity surrounding energy efficiency financing products. Simplifying the loan process could aid homeowners undertaking a time-sensitive project, and, perhaps make them more likely to pursue complementary performance improvements, like adding insulation, when replacing a roof, or upgrading to an ENERGY STAR appliance.
Considering how homeowners are currently paying for home improvements and their underlying goals for doing so.
A 2015 report by BMO Harris Bank found that 76 percent of Americans finance their home improvements through savings or credit cards, leaving a prime opportunity to offer financing options that not only improve a home’s performance and value but also improve a customer’s long-term financial health on the table. This same report found that 45 percent of Americans undertake improvements intended to make their homes more energy efficient, demonstrating the importance of lending models that allow homeowners to meet multiple home improvement goals.
Seeking greater standardization for financing products.
Nontraditional energy efficiency financing products are gaining traction in various pockets in the U.S. Property Assessed Clean Energy (PACE), in particular, is gaining momentum. The most recent data from PACENation shows that more than 148,000 homes have used PACE to fund over $3.7 billion in energy improvements, predominantly in California. From 2010–2015, residential PACE loans saw an average annual growth rate of roughly 675 percent because it tackles a significant market failure that typically occurs during the home purchase process— a lack of transparency and subsequent inappropriate valuation of home energy performance during the underwriting process. However, unlike traditional mortgage lending products, which are designed in a standardized fashion at the national level, securitized, and then sold in a well-developed secondary market, no standardization exists for nontraditional products from program to program. Unfortunately, recently introduced federal legislation could put PACE at significant risk, undermining existing robust consumer protection standards and inhibiting homeowners from making valuable home improvements. Hopefully, properly designed regulations will support PACE not inhibit it. (Read our full statement on the policy here).
Download the insight brief today to learn more about the current energy financing landscape, and key opportunities to scale these exciting products for the benefit of homeowners, lending institutions, and the environment.
Kelly Vaughn is Program Marketer at Rocky Mountain Institute. This post originally appeared in the RMI Outlet.
