The use of climate data to determine risk will become commonplace in mortgage applications, says Jackie Bennett, chair of the Bank of England’s residential property forum.
The former UK Finance director of mortgages, who recently joined climate risk analytics firm Climate X as an adviser, says brokers will not be able to ignore climate risk in the future as more lenders include such metrics in their mortgage assessments.
She says she has seen firsthand the devastating impact extreme weather events can have on homeowners and the cost it can create for insurers.
In a Q&A with FTAdviser In Focus she explains why the industry will need to move with the times when it comes to assessing and understanding climate risk.
FTA: How do you define climate risk in real estate?
JB: Climate risk in real estate broadly relates to how likely and to what extent a property or asset will be impacted by the effects of climate change over the coming years.
Such risks are set to have a fundamental impact on mortgages and housing, so it’s imperative that the industry understands them.
A standard condition for being approved for a mortgage is having household insurance – the two products are closely linked.
But say, for example, you have an area that’s been subjected to heavy flooding in the past. In the UK, we now have Flood Re that supports these high-risk areas, but if a property isn’t able to get normal insurance, that will impact its eligibility for a mortgage as well.
Other climate-related risks to property include coastal erosion, sea level rises, subsidence, storms and wildfires. These are significant risk factors that can make insurance very expensive or, in extreme cases, unavailable, and are increasingly impacting lenders’ assessments and willingness to offer mortgages on those properties.
The decision is dependent on the lender’s risk appetite.
FTA: Where’s the link between climate change and mortgages?
JB: A typical mortgage lasts between 25 and 40 years. It’s a long-term arrangement. It's therefore crucial for a lender to have an accurate understanding of how a mortgaged property may be affected by various risks over that period.
Quality climate data and risk forecasting will become vital to help lenders assess how a property or portfolio of properties will be impacted by climate change decades into the future.
We’re already seeing certain areas around the world where lenders won’t offer mortgages due to exposure to climate risk – areas that are severely at risk of wildfires or coastal erosion, for example.
Lenders are increasingly recognising the importance of understanding the future impacts of climate change and how it may affect an asset, because it poses a significant risk to the security of that mortgage and the value of the property itself.
