Why is Green Mortgage important to promote Green Buildings and how to make it work?

A green building usually costs 20-50% more than its conventional cousin.  Homebuyers would undoubtedly ask themselves questions such as: “Is this building worth of the extra bucks?”, and “Why should I spend the additional money on the green features instead of a larger place or some fancier furniture?”  It is hard to convince many homebuyers that the additional cost to acquire the green homes will take 5 to 10 years to break even.

Traditionally, green buildings are only for those who are trying to make a statement or branding purpose, both of which belong to the wealthier ones in the social hierarchy.  How can we make them more affordable and attractive to the typical homebuyers?

Mexico has developed a set of policies and measurements to promote green buildings.  The strategy is to provide financial instruments such as additional credit lines for mortgages on properties that feature sustainable and energy efficient technologies, and subsidizing property developers who achieve certain energy efficiency criteria.

A green mortgage extends a larger loan than conventionally permitted to a borrower or a discount due to energy-efficiency improvements.  A more energy-efficient building means less utility bills and greater disposable income for the green building buyer.  For example, a person is approved for a $1,600 monthly mortgage for a conventional building under his/her current credit situation should be able to get an approval for $1,700 for a green building if the green building is able to decreasing the utility bills from $300 to $200.  This would increase the homebuyer’s ability to repay the mortgage.

By the same analogy to the feed-in tariff to the solar power generation industry, the government can consider a ‘feed-in tariff’ for the green buildings in the form of a subsidized interest rate.  It would consequently increase the purchase power of green homebuyers. 

Let’s look at the combination of the two ideas above.  For example, for $1,600 per month with a 5% interest rate, a 25-year term, and 20% down payment may allow a homebuyer to buy a $380,000 home; however, for $1,700 per month with a 4% interest rate, a 25-year term, and 20% down payment may allow the green homebuyer to buy a $500,000 green house.

Going a bit outside of the traditional mortgage calculation (which may incur some marginally credit risk from the mortgage provider’s side), and some support from policy makers, green buildings can be more affordable to typical citizens.