Demand Reduction Mortgage Endowments
March 9, 2009
Thinking about how to build demand reduction into home ownership.
When taking out a mortgage in the UK most (if not all) lenders require the borrower to have some form of life insurance so that they can mitigate the risk of non-payment because of death. This has often been in the form of an endowment policy.
How about we turn that around and require the banks to provide an demand reduction endowment for borrowers ?
The issue is this; if we carry out extensive home improvements aimed at demand reduction the value of a home will probably go up. A report published today by Oracle Inc puts US willingness to pay at just under $30,000 extra for a home that is close to energy self-sufficient. That all sounds great if you are a home owner, but it means that if you are on a low income or a first-time buyer the barriers to your entry into the home market gets higher the better the home’s energy efficiency. Effectively the market builds in inequity and forces those with least ability to pay higher energy prices into the least efficient housing stock.
By asking/forcing lenders to put part of each mortgage payment into an endowment that pays directly for demand reduction improvements you could ‘build-in’ the cost of those improvements. Put a tax break on the policies to offset any damage done to lender profits and you get a rolling program of housing stock finance. The endowment pays out on a sliding scale as technologies become affordable and you drive down energy demand across the board.
The cheap stuff is often the most effective by proportion, so the endowments target lower income households, while making sure that the money is saved. Bigger ticket items, like solar PV, come later in the mortgage when the household is hopefully more affluent. As a government you get the flexibility of being able to hand spot payments out to mortgage holders accounts, without being accused of wasting money because it has to go on home improvements. As a householder you know that whatever you do your home’s energy efficiency will go up over time, so taking out some of that uncertainty about what is best to do.
As with a pension you could allow homeowners to add to their improvement pot, but you know that most won’t because they are already paying in their mortgages it doesn’t make much sense to pay in extra.
The upshot could be an improving housing stock where the most efficient homes still command a premium price, but where the market does not discriminate against low income households. Just a thought.
