Ethical Mortgage Criteria Explained

The Ethical Investors has grouped mortgage lenders in terms of their general ethical position based on some standard ethical guidelines. An explanation of the five categories follows below.

Category 1

Includes those lenders that operate wholly to social and environmental criteria. In an ideal world, these lenders are the ones that most ethical investors would wish to borrow from. In a slightly perverse way, what makes these lenders ideal actually excludes them lending to the majority of ethical investors!

Lenders in this category (and there are few) are very selective about the types of properties on which they will lend. The average home in the UK would not qualify for a loan from lenders in this category. So whilst most of us support the environmental and social activities of these lenders, we couldn't actually borrow from them ourselves.

Common properties on which loans are made are the renovation of derelict buildings, smallholdings, and environmentally sensitive new-build properties.

Category 2

Includes institutions that operate either an ethical policy in respect of their own activities, or those that apply some form of social or environmental criteria to their loans. The two areas are quite distinct and are explained below.

Lenders with an ethical policy - lenders in this category run their businesses according to an ethical code of conduct. Where they have corporate customers, the ethical policy will exclude companies operating in certain areas (such as weapons manufacture or causing environmental damage) and support companies that are improving their social or environmental impact.

Lenders with environmental criteria - some lenders will offer special mortgage terms or discounts to borrowers that meet certain environmental standards on their property. This encourages homeowners to minimise the impact of their home on the environment, by conserving energy and in the use sensitive materials.

Category 3

Iincludes the mutual lenders, such as Building Societies, and the specialist lending arms of mutual insurance companies. Because Building Societies are not involved in day-to-day lending to companies, your interest payments are not being used to finance the activities of companies that you would not wish to support (arms, animal testing, pornography, tobacco etc). Indeed, the fact that the lenders in this category are mutual societies (owned by the customers, not shareholders) is seen by many as an ethically positive factor.

For the majority of borrowers, a mutual Building Society offers the best combination of competitive rates and ethical values. At Ethical Investors, we see the mutual status of a Building Society is a positive ethical attribute. The fact that interest payments will not find their way into companies that are viewed as ethically negative, and the variety and cost effectiveness of interest rates offered by Building Societies are all issues that will appeal to ethical investors.

Category 4

This category is limited to those Banks that were once Building Societies, but are now quoted on the stock market and owned by shareholders. Provided that each lender has not moved into the area of lending to companies, they can be seen as being similar to those lenders described in Category 3, with the main difference being the fact that Category 4 lenders are not mutual.

Our ethical research is ongoing, checking to see whether or not any lender moves away from personal lending and diversifies into company lending. Unless such a lender instigates an ethical policy when dealing with companies, any change in this direction will result in a lender being moved into Category 5. If a lender does adopt a comprehensive ethical policy when dealing with companies, it will be moved into Category 2.

Category 5

Here we have placed the main banks, and those ex-Building Societies that are now either a subsidiary of a high street bank, or which have moved into company lending. Within this group, our detailed ethical research has been able to produce a 'best in class' ranking for lenders, based on their social and environmental impact.

Although the main high street banks may appear to be very similar, in reality there are quite a number of differences between each of them when their social and environmental impact is compared. Some of the banks contribute significantly more to society that others, via charitable foundations, and some of the high street banks apply comprehensive environmental criteria to their corporate lending. This latter activity can be directly linked to a company's impact on the environment, so it is critical that banks that are lending to companies take into account the effect on the environment of the money they lend.

Summary

Our aim is to find the most appropriate mortgage for your needs. By understanding the social and environmental impact of all lenders in the UK, we can work with you to find a lender that you are ethically comfortable with, and a mortgage interest rate that is the most competitive.

It is important to remember that by ensuring that your mortgage is always competitively priced, you will have greater freedom to commit funds to other areas of your ethical financial planning.