Green Deal Loan: Early Repayment

UPDATE: As of 30 March 2016, the government has stopped funding and the Green Deal Home Improvement Fund is closed to new applications. Read more here. 

What is The Green Deal?

The Green Deal is the new Government initiative aimed at helping households become more energy efficient. The scheme allows you to get energy efficiency measures installed, including things like new boilers, insulation and double-glazing, without having to pay any costs upfront yourself to get the measures installed. The measures are then paid for by the energy savings they provide on your electricity bill.

What about the Green Deal Interest Rate?

Now you may have read in the press about the interest rate associated with taking out a Green Deal loan – it is currently 6.96% fixed for the lifetime of the loan. So although it allows you to avoid paying for the installation of the measures up front, over the total lifetime of the loan you will actually be paying back both the capital and the interest.

What is absolutely key to remember is that even though you are essentially getting a loan to pay for the measures, by installing them you are going to see reductions in your energy bills which should cover the monthly repayments (this is known as the Golden Rule).

Is Repaying the Green Deal Loan Early Advised?

However, even so, under the terms of the Green Deal, you are allowed to pay back the loan early to avoid having to pay back the interest charges – but in some cases you will have to pay an early repayment charge.

The early repayment charge is calculated differently depending on the length of the original Green Deal loan (or Green Deal plan) – and this falls in to two categories:

• Green Deal plans with an original life of 15 years or less
• Green Deal plans with an original life of over 15 years

Repayments on Green Deal plans with an original life of 15 years or less

• If you have less than £8,000 outstanding there is no early repayment charge.
• If you have over £8,000 but with less than a year to maturity the repayment charge is capped at 0.5% (so for example on a loan of £10,000 the repayment charge would be £50).
• If you have over £8,000 but with more than a year to maturity the repayment charge is capped at 1.0%

Repayments on Green Deal plans with an original life of over 15 years

In this case, the calculation for the early repayment charge is slightly more complex. It involves comparing the fixed interest charge on your individual Green Deal plan (i.e. at December 2013 – 6.96%), with the current interest being charged on Green Deal plans.

• If the current rate is the same or higher then no repayment fee will be charged.
• If the current rate is lower than the rate you are paying on your Green Deal plan, then you will be required to pay the net present value of the difference.
• To try and simplify this, the Green Deal finance company (who are providing the finance) are temporarily restricting the compensation to a maximum of £6 for each year outstanding per £1,000 paid early (for example if there are 11 years left and you want to pay back £8,000, then the repayment fee would be capped at £528) regardless of how low the interest rate falls.

So bearing this in mind, you might want to consider capping your green deal plan to 15 years – even if it means having to contribute a little more up front, since the early repayment costs will be far lower.