Product innovation in the UK mortgage market: the case of green mortgages

We study product innovation in the UK mortgage market by analysing when and how attributes outside the traditional structure of mortgage contracts become pricing relevant. To do so, we develop a stylised framework that treats mortgage products as structured bundles of attributes, focusing on the two-part tariff, comprising interest rates and fees, to infer innovation from pricing patterns. Our empirical strategy first uses transaction-level data and exploits within-product variations over time to detect when new product features affect pricing, which we apply to the case of green mortgages. Matching Energy Performance Certificates (EPCs) to UK mortgage originations, we show that EPCs become pricing-relevant in 2018, with lenders starting to offer pricing discounts for loans to buy properties with higher energy efficiency. We also use offer-level data on advertised green products to precisely estimate pricing discounts. We detect considerable green discounts, which reach up to 15 basis points in 2022. Mortgages against high EPC properties are concentrated in new buildings, suggesting relaxed credit constraints and increased housing investment, with implications for the broader economy.