Paying for heat pumps

Introduction

One of the largest barriers to widespread heat pump adoption is the high upfront cost. Households often pay more for a heat pump than for a replacement boiler, even after the £7,500 grant from the Boiler Upgrade Scheme (BUS). The cost of installing a heat pump still needs to come down further to enable the mass adoption required for the UK to meet its pledge made in the Climate Change Act 2008. Installation costs should drop as economies of scale reduce the cost of manufacturing heat pumps, whilst further reductions can be realised from the adoption of tools to reduce the cost of design and labour. Closing the spark gap is also a fundamental incentive for consumers, guaranteeing savings turns a heat pump into an investment and enables novel business model development. Even as running costs and installation costs come down, many consumers will still need to access finance to purchase a heat pump.

Those who have installed heat pumps in the UK are commonly considered to be ‘innovators’ or ‘early adopters’, the people who adopt new technologies first. Innovators and early adopters are generally considered to have greater access to wealth than subsequent consumers. The BUS 2024 interim report showed that 69% of property owners (n=1,310) used savings or regular income to pay for the remaining installation costs not covered by the BUS grants, with a range of loans, mortgages, property sales, and gifts being used by the remaining sample. As heat pumps move towards more widespread adoption, we expect that the portion of homeowners unable to fund the remaining post-grant cost of a heat pump with savings will increase. 

Households without the required savings will have to look at financing options to cover the remaining cost. Green financing offers available to residents in the UK have scaled rapidly in recent years, with the number of unsecured loans on offer tripling in the last three years from 9 to 27. There has also been a growth in green mortgages being offered, with extra borrowing for specific low-carbon technologies and preferable rates depending on a property’s EPC. Despite promising growth in the number of green finance offerings, we have heard that uptake has been relatively low and many of these financial products are not accessible to all consumers. Access can be locked behind membership of a specific union, dependent upon where you live, or may not be accessible through your mortgage provider. The Warm Homes Plan has allocated £2 billion for zero-and low-interest loans to be delivered in partnership with the private sector. These funds present a valuable opportunity for private finance to test and scale more flexible product offerings.

We think that a range of financial options to pay for a heat pump is needed to suit the differing needs and preferences of consumers in the UK. People have differing preferences towards finance that are dependent upon a range of circumstances, such as their financial situation, age, family status, and whether they are in their forever home, to name a few. These variables change over a person’s life, and so can the suitability of financial models. The choice to get a heat pump can be inspired by a number of different triggers, such as a previous heating system reaching the end of its life. We need to make sure that when a consumer is interested in getting a heat pump, they are not dissuaded by not having a choice that fits their needs at that point in time.  Our initial scoping phase provided three areas for further investigation:

1. Uptake of green finance for heat pumps is low, but existing research has not explored consumer preferences for financing heat pumps
   
2. The Consumer Credit Act can discourage lenders from providing green finance products
   
3. Property linked finance (PLF) could mobilise significant capital whilst appealing to consumers who might find existing finance inaccessible or unappealing

Summary findings

Using finance to purchase a boiler is increasingly becoming a social norm, much like 80% of new cars are purchased using finance. It is very likely that finance for heat pumps will also become normalised; however, we need to ensure it is not only accessible to the able to pay market. Below are the key findings that we came across during our consumer testing and stakeholder engagement: 

• Our consumer testing has highlighted that consumers find features of less common models appealing enough to pick them over conventional loans and mortgages. Options like subscription models and pay-as-you-save (PAYS) were often considered to provide additional forms of value, such as peace of mind and ease.
  
• Properly linked finance is not a silver bullet to the barrier of upfront cost, but could form part of an accessible range of options to suit the needs of a diverse range of consumers. People we spoke to found it to be an interesting option, with the main concern being how its novelty could impact their property price.
  
• Assurance and insurance are seen as appealing by lenders and could provide them with confidence to mobilise more capital for green finance. This may be an acceptable short-term measure whilst the industry matures and the Consumer Credit Act is reformed.
  
• Simple products with low/zero interest and shorter terms were the most appealing features of the models we tested. Ensuring these aspects are incorporated into government-backed loans will be crucial for their success, but flexibility on terms is required to ensure monthly costs are accessible to a wide range of consumers. 
  
• The role of mortgage brokers. Approximately ~90% of mortgages in the UK are arranged through independent brokers. These brokers are key advice givers for consumers, but are often not currently incentivised to offer green mortgages. Very few of the consumers we spoke to had heard of a green mortgage, highlighting the opportunity that brokers could play in green finance.
  
• Consumers have low awareness of heat pumps and the Boiler Upgrade Scheme. We heard a number of stakeholders reference a lack of demand for heat pumps and finance, but our interviews indicated this is more a lack of awareness. Several people we spoke to said that they were interested in exploring the adoption of a heat pump after hearing about how they could pay for them.
  
• The cost of electricity affects the interest attached to finance products. Cheaper electricity and the resultant reduction in running costs impact affordability assessments for products like mortgages. Reduced utility bills could decrease consumer risk of defaulting on products like mortgages due to increased disposable income.
  
• The cost of electricity also impacts novel business models deployment. Currently, models like PAYS are not possible due to the uncertain scale of savings from heat pump adoption. Guaranteed savings over a longer period of time could enable these models for consumers with no savings or poor credit ratings.
  
• Installers need to be FCA accredited to advise consumers about financial products, or to be an appointed representative of an authorised firm. We think that making a consumer’s journey as simple as possible is a key enabler in accessing finance and installing a heat pump. Installers are a key actor in a consumer's journey and we have heard that there is uncertainty around what advice is permitted and the process for accreditation.

The low-and zero interest loans being made available in the Warm Homes Plan provide an opportunity to offer compelling finance, whilst safely mobilising the private sector to take over in the future. Our interviews showed that zero-interest loans with short-term plans were the most desirable components of green finance products. This sends a strong signal for the potential success of the WHP loans, although we think providing flexible terms with simple customer journeys using trusted messengers will be critical for ensuring uptake across all consumer segments. The UK government needs to continue being this messenger to provide confidence for industry to invest long-term whilst raising public awareness around the need for clean heat, and crucially, the funding available for their adoption. To enable novel new options like PLF we need to provide confidence in its consumer appeal whilst ensuring consumer protection is maintained. 

Summary of consumer testing findings

The results described here are from a small sample of 23 consumers, with four people in each segment (there were three consumers in group C due to one cancelled interview). We aimed to explore the sentiment and rationale behind why some consumers might find specific financial models more or less appealing. 

Across the interviews conducted, we observed some themes that were universal to all our consumer groups. Namely, that 0% APR’s and shorter term lengths were seen as very appealing compared to longer terms and interest-bearing offers. Older consumers felt that long-term plans did not suit their life stage and were concerned about potentially leaving debt to loved ones. Younger consumers, especially with families, generally found longer terms hard to budget around and did not like the commitment. Zero-interest offers were seen as very appealing by all consumer groups due to enabling consumers to spread costs whilst keeping their savings earning interest. 

Surprisingly, green mortgages were not considered to be very appealing by any of the consumer groups. Older participants tended to have already paid off their mortgages and were strongly opposed to the idea of taking out new debt secured against their property in this way. Younger consumer groups were interested in the potential for making use of cashback features, but preferred the idea of using other models rather than borrowing further against their homes. People often told us that it looked like it would have been a good option for themselves in the past or for other younger people, but almost none felt like it was a good option at the moment. Interestingly, a number of older consumers who were averse to green mortgages were interested in PLF as they did not have the same concerns around the length of the term. 

Less familiar options like the subscription model were seen as appealing primarily due to the peace of mind provided by having repairs and maintenance included. These were seen as a very strong form of appeal, especially by older low-income families (homeowners eligible for free heat pumps) and budget-conscious millennial parents. This desire was often explained as being due to the novelty of heat pumps and how it would alleviate concerns around trying to find someone to conduct repairs if engineers were hard to find. PAYS generated interest, but consumers wanted to know how savings would be guaranteed and many felt like the included 8% APR and 10-year term were not appealing. 

To end each interview, we asked whether interviewees would consider purchasing a heat pump now that they had seen some of the options that could be used to pay for them. Many had not heard of the Boiler Upgrade Scheme and felt that the ability to access a grant with a zero-upfront or 0% interest offer would make a heat pump an immediately viable option. The most common response was that consumers were intrigued but wanted to do some more research or felt blocked by having a relatively new boiler. A small number of people remained unconvinced, almost universally, because they would need guarantees for energy bill savings.

Enabling property linked finance

PLF is a long-term financing mechanism which allows homeowners to take out a loan that is tied to their property, rather than as personal debt. For a homeowner installing a heat pump, this means they could cover the upfront cost and pay back the loan in monthly instalments over the lifetime of the heat pump, roughly 15-20 years. 

The key advantage provided by PLF is its transferability. For example, if a homeowner moves home five years after installing a heat pump using PLF, the remaining years of repayments are transferred to the new buyer along with the sale of the property. This ensures that the original owner only pays for the heat pump while actively benefiting from it, removing the payback period anxiety that can hinder heat pump adoption. 

How could it work in the UK?

PLF is not currently available in the UK. The main blocker preventing PLF as an offering is the Consumer Credit Act, which ties a loan to a specific person. Introducing a legal mechanism which links the finance to the property so that the payment obligation is tied to whoever owns the land would be needed for PLF to work. 

Exploratory work done by the Green Finance Institute (GFI), Lloyd’s Banking Group and NatWest put forward guiding principles of how PLF could be introduced, scaled and delivered in England and Wales. Of the options explored, there are three routes for administration that stand out as most promising: local land charges (LLC), restrictions on title, and council tax. 

1. Local land charge - A local land charge is like a permanent sticky note to a property’s official government file about restrictions or financial charges imposed by a public authority. It alerts any potential buyers to the obligation attached to the land they will be purchasing. Local land charges would need to be reformed for use by PLF, but if such legislation is passed, the registered PLF charge would act as a security to the lender and the lender could potentially prevent the house from being sold unless the new buyer agrees to take on the debt.
   
   Because the local land charge is structured as a statutory charge on the property rather than a personal credit agreement, it falls outside the scope of the CCA. While this exclusion allows the obligation to be transferred between owners – run with the land – it creates a regulatory trade-off: the mechanism bypasses the established consumer protections and safeguards inherent to the CCA framework.
   
2. Restrictions on title - A restriction on title acts like a wheel clamp on a property’s legal paperwork. It is an entry recorded on the Land Registry title deed that prevents any major disposition of the property – such as selling the home, transferring equity, or adding a new mortgage – without the express consent of the lender. In the context of PLF, this restriction ensures that the heat pump debt cannot simply be ignored or left behind when the house is sold. To unlock the clamp and allow the sale to proceed, the lender requires a specific condition to be met: the new buyer must sign a Deed of Covenant, a legal document in which they formally agree to take over the remaining payments.
   
   For residential mass adoption, this solution hits a significant regulatory dead end. The issue lies in the transfer process: when a new buyer signs the Deed of Covenant to inherit the debt, they are effectively entering into a new credit agreement. Unlike a standard mortgage, which is exempt from these rules, this heat pump loan triggers the CCA. This forces the lender to conduct full affordability and credit checks on the new buyer in the middle of the house sale. If the buyer fails these checks, the transfer cannot happen, potentially causing the entire property sale to collapse.
   
3. Council tax - An existing example of PLF in the United States that uses the property tax model is called property assessed clean energy (PACE). In this model, the local authority acts as the intermediary, borrowing money from private markets (PLF bonds in the case of PACE) and then collects repayments through the property tax system.
   
   This isn’t possible in the UK at the moment as council tax is an in personam liability (against the person), whereas PACE in the US is in rem (against the thing). The model would also mean adding to the responsibilities of UK councils, which would have limited capability of acting as a financial intermediary.

So, is PLF the financial solution for consumers interested in buying a heat pump?

PLF is not a silver bullet, but we think it has a role to play in giving consumers a diverse range of financing options when they are considering purchasing a heat pump. For such a linking mechanism to exist, legislators need to be convinced of PLF’s value and pass the reforms needed to enable each different format. Similarly, the legal systems for property differ across England, Wales and Scotland and a GB-wide solution will require devolved co-ordination and potentially different mechanisms. For lenders, it could be a sizable new commercial opportunity, which the GFI’s research estimates could unlock £52-70 billion for upgrading the UK's residential building stock.

Potential solutions 

A government-backed insurance body

Insurance bodies are responsible for regulation and protection. This can include paying compensation and making sure companies are honest in their advertisements. The Air Travel Organiser’s Licence (ATOL) is an example of how a government-backed insurance body works in the travel industry: 

Air Travel Organiser’s Licence (ATOL) is a UK scheme managed by the Civil Aviation Authority that protects the consumer’s money if the travel company they booked with goes out of business. 

• It mainly covers flight-inclusive package holidays and some flight-only bookings.
• If the company fails before you travel, you get a full refund.
• If the company fails while you are abroad, ATOL ensures you can get flown home at no extra cost.
• Travel businesses must have an ATOL license and pay a small fee per passenger into a fund (the Air Travel Trust Fund) to cover these costs.
• ATOL only covers the company's financial failure; it does not cover personal issues like medical emergencies or lost luggage (what travel insurance is for).

For heat pump users, insurance bodies could offer protection by compensating them for any breakdowns and covering repair costs, insulating lenders from the risk of redress under sections 56 and 75. 

Accreditation bodies for quality assurance

A quality assurance body can reduce the likelihood of a bad heat pump installation by making sure installers have appropriate qualifications, setting minimum standards, and acting as a first point of recourse for consumers. This can help mitigate risk to lenders when provisioning loans to consumers, as it reduces the chances of claims being made under s56 or s75 for reasons previously described. The UK has the Microgeneration Certification Scheme (MCS) to make sure renewable energy products, like heat pumps, meet quality standards. Only installers that are MCS-registered can access government grants from the Boiler Upgrade Scheme on behalf of consumers. Another route is for lenders to partner with specific trusted schemes to add another layer of quality assurance to any installations that they provide finance for. The Energy Performance Validation Scheme is an example of what this additional step can look like. They work with lenders to avoid any mis-selling claims, offering an added layer of protection through working with an insurance-backed guarantee provider (IBG) and HEIS (a consumer code) that has a section 75 exclusion, meaning that the insurer is liable under section 75 rather than the lender. 

The role of the CCA 

What is the Consumer Credit Act?

In the UK, consumer finance is regulated by the Consumer Credit Act (CCA). These rules are enforced by various public and private organisations using tools like insurance, standards, and accreditation to protect consumers. The CCA is a 1974 UK law designed to protect consumers when they borrow money. It sets rules for how businesses can lend and collect debt, and details consumers' rights for products like credit cards and loans. In the context of purchasing a heat pump, there are two key protections.

1. Section 75 allows consumers to seek compensation from lenders or suppliers if the product purchased is faulty or if the heat pump has been misrepresented. If a supplier stops trading or fails to fix the problem with the heat pump, the lender that provided the loan can be held responsible.
   
2. Section 56 holds lenders offering credit legally responsible for the words and actions of the supplier or salesperson. In the case of a heat pump, an installer may promise a specific SCOP or running cost that does not materialise. The consumer could then pursue the lender for redress, despite not being the one who made the promise. 

Whilst beneficial for the consumer, sections 75 and 56 can pose a risk for lenders, an example of this being the solar mis-selling scandal between 2011-2015. Many homeowners took out loans to purchase solar panels that were sold with promises of unrealistic savings. Many of the companies that installed the solar panels then went into liquidation, leaving customers to claim compensation directly from their lenders, some of which have been held responsible for millions. The CCA is needed to protect consumers using finance for large purchases or home improvements, such as installing a heat pump or fitting a new kitchen. Despite the benefits for consumers, lenders have been discouraged from providing green finance by sections 56 and 75. 

We think that emphasis needs to be placed on ensuring consumers have a wide range of financially compelling options being made available to them, regardless of where their heat pump adoption journey starts. We will be continuing our work on green finance for heat pumps with the intent to prototype and test solutions to some of the barriers we have discussed in this report. Nesta is also part of the government-backed Green Home Finance Strategic Partnership, co-chairing a working group with the Finance and Leasing Association (FLA) that is focused on driving demand and standardising consumer journeys. If you would like to get in touch, please contact max.woollard@nesta.org.uk