I have heard that a green deal provider can increase my repayments by two per cent a year. Is this true?
Posted by Tasha Kosviner on 5 August 2013 at 9:49 am
Well, yes, it is. It has been widely publicised that a green deal plan offers a fixed rate of interest, meaning that in most cases, your repayments will remain the same throughout the course of your loan.
But a little bit of digging has revealed that there could be circumstances in which your repayments vary.
The regulations governing green deal loans contain a clause whereby providers have the option of increasing your repayments by two per cent a year from year two of your loan, so that the amount you pay increases gradually over the course of the loan.
The repayments are only ever allowed to increase by a maximum of two per cent a year but it does mean that your loan will end up costing you more.
But I thought a green deal loan operated under a fixed interest rate?
Yes it does: the 2 per cent increase will be applied to each repayment rather than to the interest on the whole loan. If, for example, your monthly repayments are fixed at £8 a month in year one, that would go up to £8.16 a month in year two, £8.32 a month in year three and by year 15 it will be £10.56 a month. So in year 15, you will pay a total of £30 more than you paid in year one. If you find this confusing you’re not alone. Certainly it’s not usual for repayments on a fixed rate, unsecured loan to be staggered in this way.
So why does this provision exist?
The staggering of repayments reflects the likelihood that fuel prices will increase over time – by some estimates, between five and 10 per cent this summer alone – and that therefore your potential ‘savings’ will increase too. The government wants to allow your provider to claim a share of this saving should they so wish. Depending on how high energy costs rise, the two per cent provision means you would effectively be paying a portion of your savings back to the provider.
That doesn’t seem fair!
We don’t think so either! They’re your energy saving measures after all and you should reaping the full benefit of having taken out a loan and getting the work done. By allowing your provider to take a share of your savings they are providing a barrier that may well deter the less well-resourced, or less bold, from getting the work done. It also favours the interests of business over that of the individual.
Why choose this kind of repayment plan?
There are circumstances however, where this kind of plan might be useful for you. Some providers may choose to use the provision to enable them to discount your initial payments – allowing you to pay slightly less earlier in the lifetime of the loan when fuel prices are cheaper, saving the larger repayments for later, when fuel is likely to be more expensive. The idea is that since fuel prices are expected to rise so significantly the total, theoretical saving you’ll be making, will increase too. As the term of your loan progresses, you’ll begin to pay off a larger portion of it, while still not breaking the golden rule – that your repayments should not exceed what you are saving in energy.
In addition, since an initial discount would mean your repayments will be lower to begin with, you may decide to borrow more, installing more energy saving measures and increasing the amount of energy you’ll save in the long term. If you do decide to do this, then there is of course a benefit to the green deal industry too – to the provider who is getting more business by loaning you more cash and to the installer from whom you’ll be buying more energy saving measures.
The two per cent provision may be particularly useful to you if the cost of the measures you have chosen mean that your repayments would exceed the savings you’re likely to make on your bills. Under the green deal rules if your repayments are likely to break this golden rule, you are not allowed to take on a green deal plan. In most cases, the way around this would be to pay the difference upfront, bringing your monthly repayments back under the golden rule threshold, but under the two per cent provision, your provider could offer you a discount to bring you back under the threshold, thus making you eligible for the loan.
The danger of course is that as your repayments increase, and particularly if energy bills don’t rise as fast or high as expected, the two per cent yearly increase means you may end up breaking the golden rule in the latter years of your loan.
How will I know if a provider will make use of the 2% increase?
The government's green deal code of practice requires providers to make it clear from the start whether or not your plan includes this provision. It also requires providers to make it clear that should energy prices not rise as high or as fast as expected, you may end up breaking the golden rule and paying out more in repayments than you are saving in energy.
Now, at the moment this is all rather theoretical since we are not aware of any providers who are currently offering to stagger repayments in this way. However, watch this space – as more providers join the market, the competition will intensify and they will all start to look at ways in which they can differentiate their products from those of their competitors. Always ask lots of questions and remember when it comes to financial plans the small print means you’re not always comparing like with like.
While there are lots of variables in the green deal – not least how much energy you’re going to use in the future and how much energy costs are going to rise – the one constant to bear in mind is that when taking out a fixed rate loan you can predict how much your loan will cost you at the end of the term. If the total cost is slightly higher but an early discount makes it affordable for you now AND you are sure that you will be able to meet the increases in the future, then the 2 per cent provision may just be the plan for you.
Is the green deal a good deal? (24 January 2013)
Consumer protection in green deal finance (3 December 2012)
If you have a question about anything in the above blog, please ask it in the comments section below.
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