The interest rate on Green Deal loans is so high that home improvements will not save householders cash

The Green Deal  -  announced today –  is dishonest and utterly misleading. The interest rate to be applied on loans to finance eco-improvements is so high that homeowners cannot possibly hope to recoup their costs.

On a loan of £5,000 the victim will pay interest on a ten year loan of just under £400 in the first year. (7.96%) Capital repayments are in addition.

The price of gas today is about 4.16 pence per kilowatt hour. (Source British Gas, standard rates for southern England). The average amount of gas needed for house heating in the UK is 14,000 kilowatt hours a year. No insulation measures costing under £5,000 and allowed under the Green Deal will reduce heating need by more than 5,000 kilowatt hours a year, saving a maximum of £208. (5,000 kWh times 4.16 pence). The typical householder will therefore lose several hundred pounds a year from participating in this wicked scheme.

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There is one exception to this. Cavity wall insulation may provide a net financial benefit to householders even if they use the usurious Green Deal finance. (The interest rate on a small loan for cavity wall insulation will cost over 10% a year). But they would be far better taking out a personal loan and repaying it as quickly as possible. The Green Deal has early repayment penalties in addition to its other iniquities.

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More analysis can be found in an earlier post on this site.

  1. Martin Normanton’s avatar

    I too would prefer a much lower interest rate.
    However if the average heat bill is 14,000KWh then roughly half of all homes will be using more, and these are the older homes which the GD is targeting. For example before we upgraded our solid wall semi we used 30,000 KWh of gas a year to heat to a modest standard, and saved 11,000.For many of these older homes boiler replacement will be cost effective even at the 8% interest.It was even more cost effective for us as we used savings, so the effective interest rate was lower.
    Also note that boiler replacement reduces your entire gas or oil bill, not just the space heating part.

    I understand that for solid wall insulation, grants will be available to cover the “excess cost” (the part not paid back in gas savings), so the smart strategy would be to take a Green Deal loan and repay it early to minimise the interest.

  2. Martin Normanton’s avatar

    reply to Mick Fletcher: B4 boiler replacement we were using 30,000 KWh a year, spending £1500 a year at today’s price of roughly 5p/KWh incl VAT.
    The boiler and controls etc saved 11,000 KWh leaving a residual use of 19,000 KWh, which is average costing @ 5p £950/yr.
    We live in a 5 bedroom semi, but we do not heat rooms we don’t use,as the kids left home before the boiler replacement and we are now just two , and we wear sweaters and fleeces. Following the boiler replacement we insulated the solid walls internally and double glazed, and now we use 7000 KWh costing £350/year. Our gas supplier was suspicious and changed our meter. details at http://www.superhomes.org.uk/6 (note the /6).
    My laser thermometer shows that the party walls are one degree warmer than our internal walls, so our neighbours contribute about 5% to our heating.

  3. Ian caton’s avatar

    You have no idea what the interest rates are going to be. The Government has no influence on them.

    They could be 10%, interest free or cash back. It depends on the provider.

  4. Chris Goodall’s avatar

    Dear Ian,

    Thanks for your comments.

    The Green Deal providers are mostly profit-making companies. They mostly intend to borrow from The Green Deal Finance Company to fund the work. TGDFC has published the interest rates which it will charge. If the Green Deal providers charge less than these interest rates they will be making a loss on each installation OR they will recoup the losses on interest payments from imposing a higher cost on the householder for the improvements. Either way, the effective interest rate to Green Deal householders is going to be over 7%. This interest rate is so high that only cavity wall and loft insulation will ever pay back the householder’s investment. (Replacing a very, very old gas boiler MIGHT achieve the right return.) In all cases it would be better to add the cost to the home mortgage rather than taking on TGDFC debt.

    The company likely to be the biggest provider of Green Deal products – British Gas – has said it will simply pass on TGDFC rates.

    Thanks again for the comments.

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