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9% Green Deal interest rate: 'competitive' or not?

9/13/2013

7 Comments

 
This blog post is inspired by an email from Stewart Gilmour, CIBSE Director of finance and Services, quoting the Chief executive of the Green Deal Finance Company (GDFC) Mark Bayley who said the interest rate was very competitive already: “If you take a typical finance for a boiler over several years, you are looking at 19% and ours is less than 9%.”


Compared to the Bank of England base rate of 0.5%, 9% does not sound competitive at all, does it? In Germany, a similar 'pay as you save' scheme as the Green Deal was hugely successful with the energy-efficient improvement of about 1 million existing homes between 2006-2009. It achieved this with low interest (subsidised) loans and performance targeted subsidies (full report by UCL Energy Institute and LSE here). The interest rate was 3-5% fixed rate for ten years, and no early redemption penalties. 

Given the high quoted Green Deal interest rates and the difficulty to get a Green Deal Finance Plan, we decided to try to finance our GD interventions another way (i.e. part savings, part personal loan).  

We cannot remortgage before 2016 as we are in a fixed rate, so we cannot release 'cheap' money this way like some others can; nor does our bank offer a low interest rate loan for energy efficiency improvements, as offered by Nationwide at below 3% interest rate for existing mortgage holders.

Yet Bayley may not have been so incorrect stating that the 9% rate is "competitive". While many advertised bank loan rates are around 5-6% (assuming good credit; more like 14-15% with fair credit); the less money you borrow, the higher the interest rate. 

For example, if you do not hold a Nationwide mortgage and are borrowing with a standard personal loan instead;  < £5000 from Nationwide will attract 11.9% interest; while between £5000 and < £7500 this is 8.9% and the lower advertised rate of 4.9% does not kick in until you borrow > £7500. Most loans work this way. 

And these are quite good rates for small amounts of money, for example the Bank of Scotland's rate for < £5000 is as much as 19.5%; though the cheapest I could find for this amount was Zopa (peer to peer lending) with 6%. 

With personal loans, the payback is usually ≤ 5 years, while for the Green Deal this can be spread over a longer term, with a minimum of 10 years, ofcourse building up proportional interest accordingly (see later). 

As this is paid back through the energy bills, selling your house would in effect pay off 'your' loan, by passing it to the next homeowner with the house sale, unless you need to pay it off early to find a buyer; there are likely to be early repayment redemption penalties for GD loans. 

Example 6, courtesy of DECC*, below highlights that repaying £3900 over 25 years at an assumed interest rate of 7.9%, will result in a total cost to be paid back of around £9000, with £362 annual repayments, or around £30 per month. However, if you can afford a higher repayment of £85 per month, you are better off taking the Nationwide loan, even at nearly 12%, as you'd paid back a total of £5100 after 5 years for the initial borrowed £3900. 

Picture
So, is the 9% Green deal rate competitive? Depends how you look at it and what other access to money you have and how much you can afford to repay each month. It is indeed a good thing that there are other incentives to bring costs down for those on low incomes. As our Green Deal Assessor said at her visit: "you may find that borrowing under the Green Deal Finance Plan is not the best way to fund the improvements, so look around." This advice is sound, it seems!

* As stated on first page; these examples are for information only and not for financial advice. All 6 examples below.
7 Comments
@linniR link
9/14/2013 02:48:32 am

Those who bleat that GreenDeal's loan rate, of about 7%, is too high, simply don't live in the same world that many people inhabit today.
Try comparing 7% with the interest rate charged by payday loan companies, to get an idea of how attractive 7% really is.

Reply
Sofie Pelsmakers
9/16/2013 06:34:51 am

Hi Linn, thanks for the comment! Ofcourse depending what you compare the GD interest rate against, it is 'good' or 'bad' - it is all relative. But I am sure you'd agree that we shouldn't be comparing the GD loan rate to payday loan rates - ofcourse the GD rate looks like a 'brilliant' deal if we compare it against those kinds of loans, when it is not 'brilliant', particularly when borrowing over a long period of time. It is also concerning that people with no easy access to money and with no good credit rating, can borrow cheaper through the GD finance plan, but are still paying a lot more than those with access to alternative funds who can borrow elsewhere outside the GD finance plan. Over a 25 year loan the disadvantages of the GD interest rate really adds up - my main concern being that ultimately the money being spent on ACTUAL improvements is therefore reduced to meet the Golden Rule. It is clear that if you can borrow from somewhere else at a lower rate(say through mortgage) or a personal loan paid back over a few years - this will give a much quicker payback of the measures installed.

Mostly though, I think it is just unfortunate that there are no incentives to save energy, and the high rate is off-putting, yet there are incentives to micro-generate! The contrast is significant and anyone doing the sums will conclude micro-renewables are a better intervention, giving a regular and guaranteed income over a long period, whether environmentally it is the right thing to do or not is ofcourse a different discussion....

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@linniR
9/16/2013 09:14:46 pm

hi Sophie
yes, it could be cheaper to borrow if you are credit worthy and can add it to a mortgage, but not everyone can do this. Payday loan rates are just an extreme example of the difference in rates available to different borrowers.
My point, though, is that too many commentators are viewing this from a relatively rich middle class background, and don't seem to recognise that 7% is an enormous improvement over typical rates offered to some borrowers.

Sofie Pelsmakers
9/16/2013 09:25:21 pm

agreed!

Reply
Richard Snape
9/16/2013 09:45:25 pm

The question I like to consider on this point is this - "Who is likely to look to Green Deal finance to fund this kind of work?". A related question, which I won't address here, is "Who is likely to consider doing this kind of work?". I rather suspect (with no hard evidence - in contrast to my usual penchant for statistics) that the people who have the assessment and consider the financing options will, in the main, be relatively rich and middle class - like the commentators @linniR mentions. I think this is a fundamental problem for the scheme. My view is that any kind of deal that requires borrowing for up front investment will tend to benefit the middle class. If you are worried about day-to-day expenses, I don't think you will want to take out a loan (seen as additional expense in the short term) to finance a "nice-to-have" investment such as insulation, which from the perspective of a bill payer today may or may not pay back. I also suspect that those who might benefit most from a 7% rate are disproportionately represented in housed in housing where they are not at liberty to make alterations to the building fabric.

I suppose this opinion of mine is to some degree supported by the stats showing that lots of people finance measures recommended by the GDA otherwise. Add to that the companies that don't / can't offer finance and it does seem fair to me to comment that the financing plan is not attractive. I think Sophie's assesment of the rate itself is fair - i.e. it's OK - good for some, not for others.

I guess a summary of what I'm saying is - it's not just about the rate.

Reply
@linni@R link
9/17/2013 03:50:27 am

I have just seen this contribution from the Green Deal Finance Co...
http://www.tgdfc.org/assets/Pamphlet%20and%20Capital%20Ec%20Report/finalaprpamphlet.pdf
Quite helpful, I thought

Reply
Anthony Breslin
9/18/2013 08:34:04 pm

i found this paper interesting when i was looking at green deal take up barriers before it 'started' (Holmes, I., 2011, Financing the Green Deal Carrots, sticks and the Green Investment Bank [Online], E3G, Available at: http://www.e3g.org/images/uploads/E3G_Financing_the_Green_Deal_May_2011.pdf)

Holmes talks about the German economic model for refurb: subsidised loans at very low rates, which has been apparently successful.

My argument though starts further back - what is money? where does it come from? if it took all of history for the uk economy to grow to contain a trillion quid (in 1997), why did it only take only a further ten years for that trillion quid to become 2 trillion quid? if there's 2 trillion quid in the economy why is everyone talking about debt? and why are so many people so poor?

The answer's simple enough that it's for a while unbelievable - to use the well known quote, "The process by which money is created is so simple that the mind is repelled". Banks Create New Money when they make a loan, and 97% of the money in the uk economy is made up of loans. so when banks 'lend', they don't 'lend' you someone else's savings, so there's no opportunity cost to the bank in lending you that money. if it doesn't cost them money to create money, why should they charge 7%, 9%, or even 2%? and the more they lend... the more profit they make. (vide: NINJA loans, Collateralized Debt Obligations and resultant global financial contagion and recession.)

the 'successful' german model then, perhaps, was that the govt borrowed money from the banks, lent it to home refurbishers, and went halves on the interest payments. the state here - not effectively, but actually - generating profits for banks when it could have created debt-free money itself and simply Spent it into the economy, rather than lent it with interest attached.

what Germany, and we, should do, is prohibit the banks from creating their own money, as was done in the 19th century by the Conservative PM Robert Peel, because it created inflation and speculative price bubbles and regional and national recessions and bankruptcies. Instead the power to create money was given solely to the state. this power has been eroded over over the years by changes to various laws, deregulation, and the advent and adoption of electronic money though, culminating in our current malaise.

So while the argument as to whether the rate is Affordable is Relevent, it's superseded by the fact that banks should not be allowed to create money at all, inevitably creating recessions as it does, while simultaneously channelling money away from useful work (insulation) into less useful and overpaid work to support mortgages on overpriced houses. lets call this work 'marketing', ho ho.

The Green Deal should form part of an economic recovery and national sustainability policy that covers all sectors of the economy. but it should be the State creating money to refurbish our homes, not Mark 'we're cutting our own throat with these prices' Bayley.

The Green Party has just adopted a policy to place money creation in public hands.

http://www.positivemoney.org/2013/09/green-party-passed-a-motion-to-place-money-creation-into-public-hands-and-end-fractional-reserve-banking/

sorry if this post's garbled and poorly written, but i'm in the middle of planning my own ECO & GD funded refurb as well :D

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