It’s now a foregone conclusion that interest rates are, and will continue, increasing (see last week and the week before for my thoughts on that). Following the rate rise last week, Australia’s biggest bank, the Commonwealth Bank (CBA) has now announced a new product that will save borrowers up to 1 per cent a year on their home loans. It is now offering lower interest rates for energy efficient homes. These loans have been around for some time, but the biggest bank in Australia entering this space is going to significantly accelerate the growth of this type of product. CBA calls it the Green Home Loan and it will be available to anyone who can show their home has been built, or renovated, in a way that minimises energy consumption. The construction industry is one of the biggest contributors to carbon emissions in Australia. Similarly, Aussie households make up the vast majority of electricity and gas consumption in Australia. As a result, the Australian Government is effectively offering, via the banks, to subsidise the home loan rates paid by borrowers to incentivise Australians to build more energy efficient homes. How does it work? Every bank has different interest rate discounts and terms of eligibility. Most of the banks in this space have green products for owner occupiers and investors. The most important criteria for eligibility is for borrowers to ensure they comply with a 7-star rating or higher in the Nationwide House Energy Rating System (NatHERS). The home doesn’t have to have solar (although that certainly helps with the rating). The NatHERS system effectively looks at how your home self-regulates its temperature taking into account factors like size and function of rooms, building materials used, the type of construction and the location and orientation of the home. To qualify, you have to engage a NatHERS accredited assessor to inspect your home and give you a rating out of 10. The assessor can tell you what you need to do to meet the minimum 7-star rating to become eligible. Alternatively, your builder can engage them prior to finalising your house design. There’s even a website that gives you a bunch of house designs that meet the NatHERS criteria in different cities around Australia. Is it worth it? I ran a little exercise some months back, taking 30 random houses that we were looking at for clients, and figuring out what additional cost was involved to achieve the 7-star rating. For some houses, because of the climate of the area, the orientation of the block and the way the windows sat within the house, there was no additional cost. In other words, the house already met the 7-star rating (bonus!). For other houses, the cost was going to be as much as $15,000 on a $500,000 house and land package. At a saving of 1 per cent, the average person would save between $4,000 and $5,000 a year (depending on how much deposit they put in). In other words, you’d make your money back within three or four years, without factoring in any depreciation benefits. Most lenders, CBA included, are offering Green Home Loans and discounted interest rates for a maximum of five years. So, you are definitely better off financially. How environmentally conscious you are will determine just how much value you see in the product. I wouldn’t be surprised if more and more lenders introduce Green Home Loan products over time. I also wouldn’t be surprised if banks start to offer the discounted interest rates for more than five years. As investors we can’t control whether or not interest rates go up. All we can do is manage the risk. One such way to do that is to look at the way we design or renovate our homes to take advantage of incentives like the Green Home Loans that can reduce our interest costs. With interest rates expected to increase by 1 per cent or more in the next year or two, a 1 per cent saving on our interest rates could make a massive difference!