Where now with Pay As You Save (PAYS) scheme

With environmental issues high on the agenda of the new coalition government, the introduction of the Feed-in Tariff on 1st April 2010 and the Renewable Heat Incentive due to commence on 1st April 2011, energy savings and renewable energy are hot topics at the moment.

Thankfully the new administration look set to continue with the Labour government’s plan to provide “Pay As You Save” loans to home owners to help them make their property more energy efficient. So what is this scheme all about

Pay As You Save Loans

The idea of PAYS is that a home owner can apply for a loan, either from the government directly or, more likely, from one of a number of proposed “commercial partners”, which will be secured against the property just like a mortgage. The PAYS loan is to be used to pay for a range of energy efficient home improvements such as cavity wall insulation, loft insulation, solar panels, heat pumps or anything which will either significantly reduce energy consumption, or generate heat or electricity.

The theory is that the resulting savings in energy bills (coupled where applicable with the payments received via the Feed-in Tariff and renewable heat incentive) will be greater than the loan repayments, so that home owners which take advantage of the scheme will actually be better off.

As an example, if you borrow £4,200 over 25 years to install a solar hot water system in a 3 bed semi then your fuel bill savings together with your renewable heat incentive income could be around £500. Your repayments would be around £330 per year so you would immediately be around £170 per year better off.

What Would the Term and Interest Rate be of a PAYS Loan ?

Nothing is decided yet as the scheme is currently a pilot, however it is anticipated that the term will be 20 – 25 years and the rates of interest will be similar to mortgage rates, so even if for whatever reason the anticipated savings in fuel bills don’t materialise, the repayments shouldn’t be too much of a burden.

How Much Could I Borrow?

It is expected that the maximum loan will be around £15,000, though it will need to enough to pay for some effective energy saving measures in full so as time goes on this will need to be kept under review. It is likely that payment will be made direct to the installer, just like with a car loan for example.

What If I Move Home?

The PAYS loan would be secured against the property just like a mortgage however unlike a mortgage; it would not need to be paid off if you sold. Instead, liability would pass to the purchaser. Questions have been raised as to whether having to take on a loan might put purchasers off, however this really depends on how the property is marketed. If there are two properties side by side which are identical save that one has a conservatory a person would expect to pay more for that property. Why not then for a property with solar panels or a heat pump? Actually this situation would be much better because as well as receiving the profits, the new owner would not have to pay the increase in value up front.

Will I Be Able to Get a Mortgage on a Property That Has a PAYS Loan Attached?

It has been suggested by some, including the council of mortgage lenders, that if there is a PAYS loan attached to a property this might reduce the amount a lender is prepared to lend, because it would increase the purchaser’s monthly expenditure. In fact this is ill-considered because the installation for which the loan is provided would have the effect of making the purchaser better off and so able to afford a higher mortgage payment. The charge to protect the PAYS loan would have to be postponed to the mortgage lender’s charge, so that in the event the lender had to repossess they would not have to repay the PAYS loan from the sale proceeds before repaying the mortgage debt. As it stands this would have to be done using a deed of postponement, which is fairly simply process, though given that legislation will be needed to bring the scheme into effect a statutory postponement could be included to simplify the process further.

When Will the PAYS Scheme Commence?

No firm date has been set so far. A pilot funded by the Department for Energy and Climate Change, involving 500 homes, is under way and will be completed in 2011. It was envisaged by the Labour government that the scheme would be rolled out in 2012 though it is not clear whether the new government plan to stick to that timeframe.

Photo by alancleaver