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7.5% interest rate approved for Green Deal loans

By Katie Anderson on July 10, 2012

MPs have finalised the government’s flagship environmental policy, the Green Deal, which became law early last week. Under the scheme, property owners will be able to receive loans worth as much as £10,000 to improve the energy efficiency of their homes by installing loft and cavity wall insulation

Green Deal loans will be subject to an interest rate of 7.5 per cent and could run for a period of 25 years.

The opposition was quick to berate the government after details of the new law were published. Labour argued that a household would be required to pay back in excess of £22,000 if a £10,000 loan was taken out for the maximum 25 year period. Clearly, paying over £12,000 in interest for home improvements such as loft insulation hardly represents a cost-effective solution for households living in draughty houses. Has the government miscalculated the capacity of ordinary homeowners to afford energy-saving measures?

The Department of Energy and Climate Change (DECC) argued that the 7.5 per cent interest rate was entirely fair, adding that participating households would be able to save more on electricity and gas central heating than they would be required to spend on loan repayments.

Shadow Secretary for Energy and Climate Change Caroline Flint said: “If it’s done properly, a pay-as-you-save energy efficiency scheme could cut carbon emissions, create jobs and lower bills for families, but the Green Deal must be a good deal for consumers”.

The Green Deal was proposed by the former Labour government before being substantially altered by the Coalition. Despite the changes, the policy remains committed to reducing domestic carbon emissions by encouraging households to improve their energy efficiency.

A spokesperson for the DECC said: “The ‘golden rule’ means that customers will be able to get the most cost-effective energy efficiency measures for their property and not pay any more for their energy bills than they do currently.

“What’s more, as energy prices are expected to rise over the coming years, households with Green Deals are likely to see their savings grow”.

The DECC spokesperson added that funding provided under the Green Deal would not hinge on an individual’s credit rating, but would be linked to the entire household.