Everything you need to know about green loans in Australia

Green loans are rapidly becoming one of the primary financial products that people inquire about when contemplating home renovations, construction, or purchases.

In addition to the energy savings related to the sustainability features in new or renovated homes, green loans provide a practical means to fund these environmentally conscious projects while typically featuring lower interest rates.

Jorge Chapa, the head of market transformation at the Green Building Council of Australia, aptly describes green loans as a “win-win” for everyone. They encourage homeowners to invest in more suitable and energy-efficient homes for Australian conditions.

As our awareness of climate change and environmental issues grows, green loans have gained prominence as an accessible way to reduce our carbon footprint and save on energy costs.

What is a green loan?

A green loan is a unique financial instrument that focuses on financing eco-friendly and sustainable projects. It caters to individuals who wish to invest in energy-efficient homes or introduce sustainability features into their existing properties.

Green loans promote environmentally responsible initiatives by providing homeowners with an affordable source of funding. These loans typically offer reduced interest rates and flexible terms to incentivize eco-conscious choices.

“Green loans are becoming a very powerful tool to incentivise people to get a better home that’s more suitable for Australian conditions,” says Chapa.

“Your home is the biggest investment you’ll make in your life, but most people know less about its energy efficiency than they do their fridge, as that has a rating and their home doesn’t. But I think awareness of the issues, and then of green loans, is now growing, which is a very good thing.”

The recent federal election, in which climate change became a huge focal point, has also driven many people to re-examine their housing choices and look at which green loans are available to buy more sustainable homes, build them, refinance them or renovate them.

“There’s more of a general understanding now of the importance of climate change and of living in a more comfortable environment,” said Lexi Airey, chief executive of Gateway Bank which offers a Green Plus Home Loan with a 0.25 per cent discount on its Premium Package Home Loan.

“It’s saving money and saving the planet at the same time,” she added.

The key principles of a green home loan

When considering a green home loan, it’s crucial to understand the four key principles that guide these sustainable financial products:

• Sustainability: Green home loans aim to support homeowners in creating sustainable living spaces. Sustainability features such as solar panels, energy-efficient appliances, and water-saving systems are encouraged.
• Energy efficiency: Energy-efficient homes are essential in reducing carbon footprints. Green loans promote the installation of energy-efficient technologies that help homeowners save on energy bills while benefiting the environment.
• Financial incentives: To encourage environmentally responsible choices, green home loans often offer financial incentives, such as reduced interest rates or discounts on loan fees. These incentives make green living more accessible.
• Carbon footprint reduction: Green home loans contribute to reducing the carbon footprint by supporting projects that incorporate eco-friendly elements, such as renewable energy sources, efficient insulation, and water conservation measures.

Pros and cons of green home loans

Pros:

• Financial savings: Green loans offer lower interest rates and financial incentives, leading to cost savings over time.

“Sometimes, you pay a premium for doing the right thing, but this is a way of rewarding you instead,” said Airey.

“You save money on your home loan, as well as saving money on having a more energy-efficient home, which is even more important at a time when energy costs have risen so much.”

• Environmental benefits: Investing in sustainability features reduces your carbon footprint and contributes to a healthier planet.
• Increased property value: Energy-efficient homes are in demand and tend to have higher property values.
• Reduced energy bills: Green homes come with lower energy consumption, translating to reduced utility costs.
• Access to incentives: Green home loans often provide access to government incentives, such as rebates and tax credits.

Cons:

• Initial costs: While green loans offer long-term savings, some homeowners may face higher upfront costs to install eco-friendly features.
• Eligibility criteria: Meeting the eligibility criteria for green loans can be challenging, particularly regarding property energy efficiency ratings.
• Limited lender options: Not all financial institutions offer green loans, limiting borrowers’ choices.
• Educational requirements: Borrowers may need to educate themselves about sustainable technologies and home improvements to make informed decisions.

Who is eligible for a green loan?

Eligibility criteria for green loans can vary among lenders. Typically, these criteria focus on the energy efficiency and sustainability of the property. Common eligibility requirements include:

• A minimum energy efficiency rating, such as a 7-Star NatHERS (Nationwide House Energy Rating Scheme) rating or a 7-Star Residential Efficiency Scorecard rating.
• The installation of energy-efficient features, like solar panels, a battery storage system, insulation, greywater systems, water tanks, and double-glazed windows.
• Compliance with sustainable building and renovation practices.
• Lenders assess the eligibility of a property based on these factors, ensuring that borrowers meet eco-friendly standards.

Steps for applying for a green loan in Australia:

Applying for a green loan involves several straightforward steps:

• Research and choose a lender: Start by researching financial institutions that offer green loans. Consider their eligibility criteria, interest rates, and the sustainability features they support.
• Check your property’s energy efficiency: Ensure that your property meets the required energy efficiency standards. If not, consider making the necessary improvements to become eligible.
• Gather required documents: Collect essential documents, such as proof of income, property details, and sustainability feature specifications.
• Submit an application: Complete the lender’s application process, providing all necessary information and documents.
• Approval and disbursement: Once approved, the lender disburses the loan amount, allowing you to initiate your sustainable project.

Banks supporting sustainable living

Several banks are at the forefront of promoting sustainable living through green loans. These financial institutions encourage eco-conscious choices by offering favourable loan terms and financial incentives to borrowers. Some prominent examples include:

Bank Australia

One of the very first banks to introduce green loans was Bank Australia, which has been offering green car loans since 2004, with green home loans shortly following. It introduced its latest iteration, the Clean Energy Home Loan, in 2020.

“That’s been very successful,” said Jane Kern, Bank Australia’s head of impact management. “I’d say 60 per cent of the customers for that are buying, or building, new houses, and 40 per cent are making upgrades to existing homes.”

“This year, we’ve announced a new climate strategy to make net zero by 2035, so it’s about what we can do to support our customers to make their homes greener.”

Commonwealth Bank

In April 2022, the Commonwealth Bank also launched its Green Home Offer, which gives access to a lower standard variable rate if homes meet sustainability and energy-efficiency criteria.

It’s classified as being climate positive – fully electric, draught-sealed, energy efficient and powered by renewables – healthy, via ventilation and insulation with minimal toxins in carpets or paint, and resilient: water efficient and climate change ready.

CommBank’s executive general manager of home buying, Dr Michael Baumann, said: “We want to reward new and existing customers who are taking actionable steps to reduce their environmental footprint by investing in homes that are efficient, comfortable and healthier for them and the environment.

“We expect all residential homes to be built to these standards over the coming years as we move towards a net-zero future, and by introducing the new Green Home Offer we want to encourage customers to take steps now to protect the environment and their home.”

Frequently asked questions

What is the difference between a green loan and a personal loan?

Green loans are designed specifically for funding sustainable and eco-friendly projects, such as home renovations or improvements that benefit the environment. Solar power is a great example of this initiative. In contrast, personal loans can be used for various purposes and are not exclusive to eco-conscious initiatives.

Could I use a green loan to add solar power to my home?

Absolutely! You can use a green loan to finance the installation of solar panels on your roof. Many green loans specifically support the adoption of solar energy and other eco-friendly home improvements.

By using a green loan for solar panel installation, you not only reduce your environmental impact by generating clean, renewable energy but also benefit from the financial advantages that often come with green loans, such as lower interest rates and potential incentives. It’s an excellent way to make your home more energy-efficient and sustainable while saving money in the long run.

How do you pay off your green loan?

Like any other loan, a green loan must be repaid according to the terms and conditions outlined by the lending institution. It’s important to make regular payments to ensure that the loan is gradually paid off over time. Failing to make payments as agreed could result in penalties or additional interest charges.

However, the advantage of green loans is that they often come with lower interest rates and financial incentives, making the repayment process more affordable and rewarding.

As you invest in energy-efficient and sustainable features for your home, you’re also investing in long-term savings, which can help offset the cost of the loan.

What is the green banking approach?

Green banking involves financial institutions supporting and promoting eco-friendly and sustainable initiatives. This approach includes offering green loans, investing in renewable energy projects, and implementing eco-conscious banking practices to reduce the environmental impact of the financial industry.

Green loans are becoming more accessible and attractive for those looking to invest in a sustainable future. Whether you are building, buying, renovating, or refinancing, these loans provide the means to make environmentally responsible choices while enjoying long-term financial savings.

As the world continues to embrace sustainability and environmental consciousness, green loans have become a vital tool for creating energy-efficient homes, reducing our carbon footprint, and protecting our planet.