First time buyers should avoid the ‘green’ mortgage
By Damian Clarkson     30th January 2008

Choosing an eco friendly mortgage could leave first time buyers green around the gills when it comes time to meet the payments. That’s because they are far more expensive than traditional mortgages, costing the average first time buyer (FTBs) up to £550 a year more.

And with their finances already stretched to the limit by sky high property prices and stricter lending rules, trying to do their bit for the environment as well could prove a fast track to financial disaster.

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A practical example
In case you’re unfamiliar with them, green mortgages essentially work the same as traditional ones, except that your lender agrees to partake in some eco-friendly cause on your behalf. This usually involves planting trees, or donating money to a relevant charity every year.

To illustrate the difference in cost, we pitted some of the best ‘green’ fixed and discount mortgage deals against traditional market leading ones.

The average first time buyer (FTB) pays around £140,000 on average to get onto the property ladder, so we’ll use this as our mortgage amount, repaid over 20 years.

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Fixed rate deals
Both the Co-Operative Bank and Norwich & Peterborough Building Society are fairly popular green mortgage specialists. The Co-Operative Bank offers a three year fix with a 5.94% rate and £499 arrangement fee, while Norwich & Peterborough has a four year deal at 5.68% with a £475 fee.

By comparison, Bristol & West Mortgages has a far more competitive 5.49% rate on its three year fix, albeit with a slightly higher fee of £699. Leeds Building Society has just announced a new 5.35% on its five year fix, with a £995 arrangement fee.

As the table below shows, the green deals simply can’t compete. The Co-Operative deal is the worst of the lot, costing up to £45 more per month, and £530 annually than the cheapest deal from Leeds Building Society.

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£200,000 mortgage over 20 years

	Rate	Duration	Fee	Average Monthly Cost	Average Yearly Cost
Co-Operative Bank	5.94%	3 Years	£499	£998	£12,144
Norwich & Peterborough	5.68%	4 Years	£475	£977	£11,846
Bristol & West	5.49%	3 Years	£699	£962	£11,780
Leeds Building Society	5.35%	5 Years	£995	£951	£11,613

Discount mortgage
On the variable rate side, the Co-Operative Bank has a three year discount mortgage with a 5.74% rate and a £399 fee, while Norwich & Peterborough charges a high 6.29% rate but no fee whatsoever on its four year deal.

Looking at traditional discount mortgages, Nottingham Building Society offers a competitive 5.64% rate on its five year deal with a £595 fee, while Mansfield Building Society has a 5.67% rate and a £474 fee on its three year deal.

Looking at the overall results, Norwich & Peterborough’s offer is by far the worst, costing £400 a year more than the Co-Operatives green mortgage. Mansfield Building Society was the cheapest, costing £11,769 a year, or £550 less than NPBS.

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	Rate	Duration	Fee	Average Monthly Cost	Average Yearly Cost
Norwich & Peterborough	6.29%	4 years	N/A	£1,026	£12,318
Co-Operative Bank	5.74%	3 Years	£399	£982	£11,918
Leeds Building Society	5.64%	5 Years	£595	£595	£11,808
Mansfield	5.54%	2 Years	£966	£951	£11,769

Green mortgages aren’t aimed at you
With the credit crunch pushing most household’s finances to breaking point, it is interesting to note that demand for green mortgages has not been diminished during this volatile period.

Put simply, this is because green mortgages customers are generally those who have more than enough money, so that the cost of their repayments isn’t an issue.

Norwich & Peterborough admitted as much last week when it pointed out that green mortgage customers tend not to be rate driven, but ethics driven.

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Help yourself first
However noble the aims of a green mortgage, it’s imperative that first time buyers secure the cheapest possible deal around.

Credit crunch aside, it’s never been more expensive to get on the property ladder, with the average FTB household having to set aside some 35% of income just to cover mortgage payments – that’s 2% higher than it was during the last housing boom in the 1990s.

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Tracker Variable vs Fixed
So how do you know what type of mortgage should you go for? Tracker or discount deals could be attractive, given that the base rate looks likely to fall by 0.5% this year.

But of course with a variable rate mortgage you will be exposed to the market for at least two years, so you need to be able to afford your repayments if prices end up rising instead.

Given their precarious situation, most FTBs can’t afford this risk, so you may want to consider a fixed rate deal. While this may prove more expensive when the base rate falls, it does give you the security of knowing your monthly repayments won’t change.

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Article produced by EveryInvestor.co.uk