Few consumers realise that a property’s energy performance can affect their ability to obtain a mortgage. In the future, climate-related threats such as floods, wildfires and extreme heat could also play a greater role in lending decisions, potentially influencing whether properties qualify for financing and the terms borrowers receive.

Researchers at Aalto University interviewed 25 green finance experts from major European banks and real estate advisory firms. They found that a high energy rating can help borrowers qualify for green lending and other financial benefits, while properties with poor ratings may be harder to finance. “For people taking out a mortgage, or considering buying a home, it is important to understand that the environmental performance of the property already affects banks’ lending decisions and loan terms,” says Seppo Junnila, Professor of Real Estate Economics at Aalto University.

Energy Performance Certificates (EPCs) have existed in the European Union since 2002, but became increasingly important to lending after EU Taxonomy rules were introduced in 2020. Banks now use energy ratings when assessing green financing. Properties with low ratings may require costly renovations and could lose value over time, increasing the financial risk for lenders.

“In practice, a property with a very poor energy rating may not qualify for a loan at all, because banks may consider it too high-risk,” says doctoral researcher Maria Holopainen. By contrast, highly rated properties that qualify for green lending may receive somewhat more favourable financing terms than conventional loans.

Climate risks could become another important consideration. Banking experts expect floods, wildfires and other extreme weather events to increasingly influence property financing, although their significance varies by location. In southern Europe, wildfires, heatwaves and floods already carry considerable weight, while recent flooding in Sweden has heightened awareness of physical climate risks in Nordic countries.

The researchers also identified a contradiction in the current financial system. Despite ambitious EU targets for improving existing buildings, financing arrangements can favour new construction over energy renovations. New buildings can more easily achieve an A energy rating and meet EU Taxonomy criteria, making them more attractive for green financing. Renovation projects, meanwhile, can be riskier and more complicated for banks to classify and report as green.

Yet renovations will be essential to meeting climate and carbon-neutrality goals. “From a sustainability perspective, renovations are a far better option than new builds—in fact they are essential if we are to reach the agreed on climate targets and carbon neutrality by 2050,” Holopainen says. “High-performing new buildings alone are not enough.”

The researchers warn that these trends could also deepen housing inequality. Wealthier households and investors may increasingly purchase expensive, energy-efficient homes, while people with fewer financial resources could be left with lower-quality properties carrying higher energy and climate risks. Those already in stronger financial positions could therefore benefit most from favourable green financing. Holopainen says the challenge is ensuring that people in more vulnerable financial positions can also access sustainable homes.

More information: Maria Holopainen et al, Is green the new normal? Understanding current sustainability practices in European residential property lending, Journal of European Real Estate Research. DOI: 10.1108/JERER-09-2025-0074

Journal information: Journal of European Real Estate Research Provided by Aalto University