How do I pay for energy efficiency improvements to my home?
Posted by Adam Hewson on 5 April 2013 at 12:36 pm
This is a very simple question and, a bit like Murphy’s Law, a pretty complicated answer. But, here are a few, hopefully helpful, thoughts.
When we go to buy something, we all make conscious and subconscious decisions about why, when and how we do this. We often don’t realise that we weigh up the benefit of having the item now, versus some time in the future; paying in cash from our pocket, or a credit card or loan; and whether to buy less capable but cheaper, or more expensive but better. Economists call this “opportunity cost”, or what is the cost or lost benefit of not doing or buying something, versus actually doing or buying something.
Energy efficiency is complicated because the benefits we get from energy efficiency measures accrue over long periods. Renewable energy is slightly easier because of the subsidies available, but this only helps the payback, not the upfront cost. It is therefore tough to apply the normal criteria we use for going round the shops.
So if buying now versus later is complicated, paying with cash or a loan is even more complicated. Here the thorny issue of cost of money rears it ugly head. Simply put, a certain amount of money always has a cost attached to it. If you have cash burning a hole in your pocket, spending it has an opportunity cost attached because once it is gone it is gone, you can no longer spend it on something else, which might suddenly become more important or urgent.
Spending someone else’s money (a loan) has a cost attached to it because you pay for the privilege (interest) and have to find the money over time anyway (you have to repay it from your own cash). There may also be clever ways to change the costs such as putting up your home as collateral (if you don’t repay, you could lose the house), taking the loan over a longer or shorter time, or asking someone to guarantee a loan on your behalf (I saw a sign in a café once that said “credit available to all customers, subject to applicants being over 80 and accompanied by both parents).
Simply put, unless you are paying with cash, comparing different ways of borrowing money is complicated to do properly. But the very best way to borrow money is to ensure you do it over the period of time you are going to continue using or enjoying whatever it is you are buying. We use houses for many years, so borrow over many years (often up to 25 years). Smaller items like cars, or fridges or sofas, we use for a much shorter period or at least we have a warranty from a manufacturer for a shorter period, so we borrow over a shorter period (2-4 years). Sometimes we let the lender take security over the item (car finance) sometimes not (sofa finance). All of these decisions are about the management and spreading of risk, both by ourselves and by those we borrow from.
So for energy efficiency or renewable equipment, whose useful life can be 10-25 years or more, we should be looking to find money over that sort of period. So here is my own guide to paying for energy efficiency or renewable technology:
1. Use your mortgage – always the cheapest and longest way of borrowing money. It remains attached to your house but, hopefully, the works you have done will have increased the value, so you get it back when you sell. Nationwide and the Co-op have both specifically identified this as a good use of mortgage money.
But you have given your house as security.
2. Use investment money – this money will have been put away for a long time anyway (you’ve already decided you don’t need it in the short term) and is probably not earning much return at the moment. Investing it in your property might get you a better overall return, over the same longer period.
But you are increasing your exposure to your home, rather than spreading the risk around.
3. Use Green Deal money – it is for a sensibly long time (10-25 years) but because it is not attached to your house, it costs more than a simple mortgage.
But it is quite restrictive on what you can do and how much you can actually borrow.
4. Use cash – if you have enough of it and are unlikely to need it for short term “living” or emergencies, then this is perhaps the easiest way to pay for a project.
But it is not the most cost effective way to pay for a long-term asset.
5. Use a short term loan - can be easy to get access to and often seems “too good to be true”
But a very expensive way to pay for long-term investments.
6. Use a credit card – great for very short-term cash management and many useful consumer protection benefits.
But terrible for paying for long term investments.
Picture credit: Nicole McMurray
About the author: Adam Hewson is director of ReEnergise Ltd
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