So you want to save the planet? Get a mortgage

Lenders are planting seeds of change, but Esther Shaw finds that principles come at a price for borrowers who go green
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Ethical principles can be applied to pretty much every part of your daily routine. You might, for example, buy unleaded fuel before visiting the Fair Trade shop, and recycle glass at a bottle bank on the way home.

Your personal finances are no different. Green funds allow investors to back companies that use renewable energy sources, while some banks are now promoting ethical policies such as not lending to countries with corrupt governments.

Britons invested more than £10bn ethically last year, according to the Co-op Financial Services (CFS) group - nearly a fifth more than in 2003.

But while the green pound may have become a mighty force, consumers have been slow to get ethical in in one particular area of their financial planning: mortgages. Ethical home loans represent a tiny fraction of the UK housing market, sold only in their thousands - so few as to be negligible, says the Council of Mortgage Lenders.

We are much less concerned about who we borrow from than who we give our money to, according to the Ethical Investment Research Service.

"Part of the reason is supply and demand," says Melanie Bien, an associate director with the mortgage broker Savills Private Finance. "Borrowers simply aren't asking lenders for green loans, so mainstream lenders cannot see the value in offering them."

Green home loans also tend to be expensive, as those taking them out are paying for the cost of looking after the planet.

Rebecca Tully, 30, who comes from Hackney in east London, considered a green mortgage after returning from a stint working on a farm in South America. "There was so much more emphasis there on recycling and reusing, and putting back into the earth whatever you take out of it," she explains.

On the advice of an independent financial adviser, Ms Tully approached the Norwich & Peterborough (N&P) building society. Just under a year ago, she moved the mortgage on her attic flat from the Halifax to N&P's four-year fixed-rate carbon-neutral mortgage, paying 5.48 per cent interest.

This may not be comparable with mainstream deals, but Ms Tully says: "Price is not my priority. I love the fact the lender plants trees on my behalf."

What you get for your money with an ethical mortgage varies between the three lenders that offer them. These are N&P, the Co-op bank and the Ecology building society.

Under its carbon-neutral home loan, N&P plants 40 trees over a five-year period to offset the carbon dioxide emitted by your property. However, the mortgage is limited to two types of customer. You can qualify, first, if you're buying a brand-new home built to a higher-than-average standard of energy efficiency. The property needs a rating of 100 or more on what is known as the housing industry's Standard Assessment Procedure.

Homeowners with existing properties wanting the N&P mortgage must be prepared to invest in energy-efficient measures such as cavity insulation, double glazing or solar panels. In this case, N&P will give customers £500 cashback to help pay for the work.

But the rates on its green home loans aren't great. For new-builds, N&P offers a four-year discounted variable-rate deal at 5.55 per cent (1 percentage point off its standard variable rate, or SVR). That's a whole percentage point more expensive than comparable deals from other lenders.

For existing properties, the same four-year discount deal is higher still: 5.8 per cent (0.75 percentage point off the SVR).

N&P's fixed rates are slightly cheaper, ranging from 5.18 per cent to 5.38 per cent, but you have to set your rate for a minimum of four years.

The Co-op has a different approach. It makes a small payment for every mortgage on its books to Climate Care, a company dedicated to reducing atmospheric carbon dioxide through, for example, reforestation. The total in 2004 was £225,000.

The bank also provides every homebuyer with a free energy report, beside its basic lender valuation.

The Co-op has a wider range of green deals than N&P. It offers fixed, discount, variable and tracker mortgages, including a three-year fix at 4.89 per cent or five years at 4.99 per cent.

The Ecology building society provides loans of up to £350,000 on properties with "an ecological payback". These are specialist deals for those who want to buy and renovate derelict homes or convert old buildings. Many other lenders consider such properties too risky and won't lend on them.

But borrowers must pay a premium. Ecology has only one standard variable rate, currently 6.3 per cent, although customers of two years' standing qualify for a 0.25 per cent loyalty discount.

Whether it is worthwhile taking out a green mortgage will depend on your attitude to environmental issues. Forty trees planted over five years might appear a marketing gimmick to some, but to others a real contribution to the future of the planet.

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