The GFI, together with Lloyds Banking Group and NatWest Group, released a paper, in November 2024, exploring the potential to introduce Property Linked Financing. It is intended that PLF will be a new financing product to accelerate the uptake of environmental improvements on residential and commercial properties.
What is PLF?
PLF is a form of financing that is attached to the asset that is being improved, rather than the person or company taking on the financing. Upon the sale of the property, this loan is able to transfer with the asset and the new owner becomes responsible for the loan. This would be a large shift in property lending in the UK albeit one that exists in the US, Canada and Australia.
PLF would be a separate lien from a mortgage or secured loan and, it is suggested, will rank below the mortgage and above all other securities in the capital stack.
The GFI’s scoping is focused on the challenges in retrofitting properties (residential and commercial) for environmental improvements, including:
the term of a loan for improvements (usually 10 years +) not matching the term of the asset ownership; and
recent high interest rates on loans
How does PLF work?
PLF aims to solve these challenges by being a long term source of financing, which overcomes the “payback period” barrier. This allows the asset owner to borrow on favourable terms to fund up to 100% of the up front costs of the environmental improvements. Both the longer term financing and reduced interest costs can create a reasonable return on the investment. By linking the financing to the asset, upon the sale, the loan can transfer to the new owner who will also benefit from the improvements.
The loan transfer is justified as the benefits of the environmental retrofit will be experienced by the new owner, therefore, it might be prudent for them to participate in the cost. Unlike an extension or other home improvements, the value of the house may not necessarily increase with environmental interventions. It is not suggested that PLF can be used for “typical” home improvements and certainly not if they are not environmentally improving.
How will this affect the UK financing market?
The GFI paper has highlighted a number of challenges PLF adoption might face in the UK:
Resistance to change. Would buyers want to take on a property with a loan linked to it that was not their initiating?
Personal and corporate uptake given the above
Legislation update. Changes needed to allow for a change in the restriction on title
Bank adoption where they do not see demand for the new product
The paper looks at ways to overcome these barriers. The main channel proposed is through bank and government consumer education surrounding the ease, consumer protections, mechanisms and flexibility with a mortgage.
Pineapple sees PLF as a sustainable solution:
Part of the work we do at Pineapple is finding the optimal financing solutions for given
interventions. Therefore, for me, I see the benefits of PLF as:
an alternative product in the market that offers a different structure
longer term financing is required to make environmental interventions financially viable; and
within the education part, show the financial products as well as all the potential interventions to really stimulate interest and show that each property requires a different solution - e.g. heat pumps are not for everyone and an electric boiler can be more beneficial
Further to the challenges the GFI raised, I see:
will new buyers be willing to take on the loan? I can see many buyers insisting that the seller uses the proceeds to pay down the loan (even though it is not contractually an acceleration event)
government led education schemes are a potential trip hazard. Banks can bring new products and allow the government to offer some sort of validation of the protections
would PLF education be seen as more “nanny state” interference about the environment, like heat pumps, which - given their cost and intrusiveness - is turning off consumers to all solutions?
In conclusion
In all, I welcome the paper and the product as it can provide further assistance in speeding up decarbonisation in the built environment. Of course, careful thought around structure, legislation, T&Cs, etc. will require a lot of work. On the positive side, there are other jurisdictions to learn from and we have a dynamic financial market that is used to innovation.
