Expert points to important new data
Climate change continues to impact UK weather, generating warmer but wetter conditions and bringing a significant increase in flood risk to many UK residences.
For lenders, the risk is not just present day, but anything that might occur in the duration of a 30-year mortgage, and the impact that increased hazard might have on the value of the property as a mortgage security.
Graeme Gillespie (pictured), head of consulting at Hometrack, said lenders could simply reduce their exposure by focusing on low flood risk areas. However, he added that this would significantly limit their commercial opportunities and unfairly punish many homeowners.
So, how can lenders mitigate flood risk in their portfolios and what are the broader concerns climate change presents to both lenders and homeowners?
Broader risks presented by climate change
Gillespie said climate change presented a much broader risk to homeowners and mortgage lenders than just flooding.
“There are other physical risks such as subsidence, coastal erosion and storms; there is also the risk from transition to a greener, lower carbon future, in the form of energy costs and property carbon emissions,” he said.
With energy costs soaring, and banks keen to avoid funding high-emitting properties, Gillespie said he was starting to see clear properties with better energy efficiency and lower emissions command a premium price when sold.
“Just as lenders need to forecast the possible impact of flooding on the future value of property, they also need to consider changing appetite for properties that cost a lot to heat and maintain,” Gillespie said.
In addition, he said there were economic factors outside of the mortgage market that were being driven by climate change which had an impact on residential houses. Insurance companies, for example, were increasingly concerned that higher risk properties may not be insurable in the longer term, particularly if current centrally funded reinsurance tools were withdrawn.
Uninsurable properties could not generally be taken as a security on a mortgage, Gillespie said, meaning certain properties might only be sellable to cash buyers.
“It is likely that this would impact their market value and could be the start of a two-tier market, for ‘standard’ and ‘non-standard’ properties,” Gillespie said.
There was also broader reputational risk for lenders when it comes to climate change, Gillespie said - for example, if a borrower believed the lender was to blame for lending them money on a property that was likely to be severely impacted by climate change.
“The Law Society has already issued advice to conveyancing solicitors on how ‘when approaching any matter arising in the course of legal practice, to take into account the likely impact of that matter upon the climate crisis in a way which is compatible with their professional duties and the administration of justice’,” he added.
Gillespie said lenders needed to also consider what information they should share with a house buyer to ensure they were fully informed.
Solutions for lenders amid climate change
For lenders there were a range of solutions, Gillespie said, most of which started with collecting data on individual properties.
“Lenders are increasingly mitigating flood risk in their portfolios by using predictive data that works at the level of individual property locations,” said Gillespie.
This type of data, he said, could be used to inform lenders of the threats they have lurking in their back books, and help them decide on which properties they might no longer wish to finance in the future.
“This can be achieved by alerting lenders to the level of concentration risk they are currently exposed to on a particular street when they receive a new application for mortgage finance, or declining applications to keep their exposure at an acceptable level,” Gillespie added.
For physical risks, such as flood and subsidence, he said, this allowed lenders to avoid or price in the risk on specific exposed mortgages.
“By far the easiest way for lenders to reduce the carbon footprint of their lending portfolio would be to selectively lend on newer, more efficient properties,” he explained.
However, Gillespie said the industry recognised that this did not address the real issue of the more than half of properties with an EPC Band of D or lower. New-build properties were typically only 10% of annual property sales.
“Instead, builders, lenders, government and homeowners have to work together to improve the standards of these older properties, more than half of which have an EPC Band of D or lower,” Gillespie said.
Lenders at the vanguard of this work, Gillespie said, were using granular data to help homeowners model possible improvements to their properties, and provide them with additional green financing to fund the work.
How do you believe lenders could mitigate flood risk in their portfolios? Let us know in the comment section below.
