A new Government-backed loan scheme to help households pay for heat pumps, solar and batteries is set to be unveiled, with interest rates as low as zero per cent on offer.
The scheme has been designed to encourage more households to invest in green tech to lower their energy bills, but Citizens Advice warns limitations with the scheme risk leaving behind a “squeezed middle” that can’t access support.
While some personal loan providers may be able to offer interest rates close to zero per cent, the majority of larger lenders will offer loans in the region of 2-4%, according to multiple sources.
The low interest loans will cover heat pumps, solar and batteries, but won’t cover insulation. It comes amid rumours that the Government is preparing to cut its Boiler Upgrade Scheme, which offers non-repayable grants for heat pumps.
How will the new loan scheme work?
The Government is funding lenders to help them provide green loans with lower interest rates than the deals currently on offer.
There are currently a limited number of low interest rate loans for green upgrades on the market, but they usually have tight restrictions. For example Nationwide offers a zero per cent green upgrade loan for its mortgage customers for a duration of two or five years.
Mainstream personal loans typically have higher interest rates, with the best rates sitting at around 5.9 per cent APR.
Under the Government’s new scheme, the Treasury will pay participating lenders up to 20 per cent of the loan amount, which will allow lenders to offer deals with rates up to five percentage points lower than they otherwise would have.
For example, if a lender currently offers solar panel loans with an interest rate of seven per cent then they could offer deals with an interest rate of two per cent by joining the Government’s scheme.
The full list of lenders participating in the scheme is yet to be announced, but is expected to include a range of organisations, including high street banks and Buy Now Pay Later lenders.
What can you fund using the loans?
The loans will be for a minimum of three years and will cover the following technologies:
- Solar panels – up to £15,000
- Electrical storage battery – up to £15,000
- Air-water source heat pump – up to £20,000
- Air-air source heat pump – up to £10,000
- Ground source heat pump – up to £35,000
- Biomass boiler – up to £20,000
- Heat network connection – up to £7,500
- Micro-renewable system (such as domestic wind turbine) – up to £20,000
What are the limitations?
The loans will not cover insulation, which is often recommended for households installing heat pumps to help the heat pump work efficiently.
James Dyson, Senior Researcher at the climate change think tank E3G said the loans will be “helpful” for people looking to “protect themselves from high gas prices”, but said it was “a shame they can’t be used to pay for insulation, which helps people to stay warm and keep their bills low”.
Gillian Cooper, Director of Energy at Citizens Advice, said the scheme will help “households who can afford to borrow” but “cannot distract from the serious threat of cuts elsewhere within the Warm Homes Plan”.
The Government is reportedly considering cutting the Boiler Upgrade Scheme, which offers subsidies of up to £7,500 for households switching from a gas boiler to a heat pump.
The cuts are being considered as DESNZ looks to cut £2bn from its budget to fund an increase in defence spending.
“We’re particularly worried about ‘squeezed middle’ families who risk being left behind by this loan scheme. They earn too much to qualify for low-income support towards efficiency upgrades, but don’t have enough disposable income to take on new debt or cover the upfront costs,” Cooper said.
The Government offers grants to pay for green upgrades via its Warm Homes Programmes, but this is typically for households on means-tested benefits or with a combined income below £36,000.
When will it be launched?
Lenders were expecting the loan scheme to be launched earlier, but this has now been delayed and is expected after the budget at the end of the month, according to sources.
“Given our energy bills are about to go up again, the most important thing is for the Chancellor to roll this loan scheme out in full now, so families can kit up their house before the winter,” Dyson said.
A DESNZ spokesperson said: “Our Warm Homes Plan will upgrade millions of homes, lower bills and lift families out of fuel poverty.
“The Warm Homes Loan Scheme will offer low-interest or zero-interest financing for home energy upgrades. We will provide more details shortly”