Insight Brief Release: How to Scale Home Energy Financing Products
Making Sense and Cents of Available Options
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 homebuyer’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 PV—improvements that can vastly improve their homes’ comfort, safety, value, and energy performance.
Rocky Mountain Institute’s 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 adapt to the extent of the value driven by home energy improvements. And—even when they do—securing financing can be arduous for a homeowner and even present an insurmountable hurdle.
The good news is 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 to scale energy performance improvement financing options that are attractive and relevant to homeowners. Factors that lenders can consider include:
- Consider a homeowner’s timing and trigger points for energy upgrade decisions.
One time certain financing options may be used more often than others is when homeowners commonly consider pursuing energy upgrades. For example, 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 home purchase is a trigger point ripe with opportunity to offer financing options that not only cover, but simultaneously incentivize, energy performance improvements. Meanwhile, 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. Therefore, minimizing the complexity surrounding financing products could aid homeowners seeking to complete a time-sensitive improvement, perhaps making them more likely to pursue complementary performance improvements, such as adding insulation.
- Consider how homeowners are currently paying for home improvements, and their underlying goals for doing so.
A 2015 report from BMO Harris Bank found that 76 percent of Americans finance their home improvements through savings or credit cards, signaling 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. This same report found that 45 percent of Americans undertake improvements intended to make their homes more energy efficient, showing the importance of lending models that enable homeowners to meet multiple home improvement goals.
- Seek 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 saw an average annual growth rate of roughly 675 percent because it tackles a significant market failure otherwise occurring during the home purchase process—which comes from a lack of transparency and subsequent appropriate 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. However, it is RMI’s hope that regulations for PACE be designed in accordance with the true nature and definition of the mechanism (read our full statement on the policy here).
- Elevate 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 addressable 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. If we want to empower homeowners to make more home energy improvements, traditional lenders must be enabled to sell such products using conventional automated underwriting systems.
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.
