Should you take out a 10% interest loan to get a heat pump installed?

 Octopus Energy customers can now get a loan to pay for having a heat pump fitted – but the deal is not as good as customers may be able to get elsewhere.

Many homeowners are keen to make their properties more energy efficient but are put off by the high cost of getting a heat pump to replace their gas boiler.

These pumps cost between £8,000 to £30,000 to buy and fit, with the big price range reflecting which type you buy and what sort of home you have.

Now Octopus Energy has launched a loan pilot, backed by lender MBNA, to finance the cost of getting a heat pump fitted. 

This is Money has delved into the terms of the Octopus loan to see what it is offering. 

Heating up: Competition to fit heat pumps is hotting up, with the launch of a new Octopus loan

Octopus already offers one of the cheapest heat pumps on the market. 

Its air source heat pumps start from £3,000, which Octopus claims is the cheapest price in the UK.

The energy firm is making the bold claim despite hiking the minimum cost of its heat pumps by £500, from £2,500 to £3,000, within just five months.

That £3,000 price is also reliant on homeowners being accepted for a £5,000 grant available through the Government’s Boiler Upgrade Scheme.

Octopus’ main rival with cut-price heat pumps is British Gas, which is selling the boiler replacements for as little as £2,999.

Octopus customers can now get a loan from £1,000 upwards to cover the cost of getting a new heat pump.

Once customers have gone through the application process with Octopus and got a quote they will be asked if they are interested in an MBNA loan.

The loan can be paid back over a period of between one and seven years.

The interest rate will vary depending on the amount you are borrowing and the length of the loan.

However, Octopus says the average interest rate – or ‘annual percentage rate’ will be around 10.7 per cent a year.

Someone getting this interest rate will pay £700.81 in interest on a £3,000 loan if repaying over four years. 

However, only 51 per cent of customers will be offered a rate the same as, or lower than, the average of 10.7 per cent.

The remaining 49 per cent may be quoted more, due to how lending rules work when calculating interest rates.

Is the Octopus heat pump loan worth it?

Experts say the Octopus loan is pretty decent, but that consumers may be able to borrow the same amount for a lower interest rate elsewhere.

However, customers may choose to look beyond the interest rate on the Octopus loan.

That is because Octopus also offers to apply for the Government heat pump installation discount on homeowners’ behalf, saving them time. 

Chris Lilly, of personal finance comparison site finder.com, says: ‘You could of course apply for the Government grant yourself, and separately apply for a personal loan from your bank or another lender.

‘You would likely be able to find a slightly cheaper deal by looking at the whole loans market depending on the amount you need and the term over which you wish to repay.

‘On a £3,000 loan over four years, which is the example Octopus uses, you could save £50 overall by borrowing through M&S Bank, for example.’ 

The interest rate on this loan is 9.9 per cent so slightly lower than the one MBNA are offering. 

An Octopus spokesperson said: ‘Customers choose us for heat pumps as we have a trusted brand, and a well-known track record in customer service that makes buying a heat pump with us quicker and easier. 

‘We also have a lot of expertise and numerous products which makes switching to a heat pump through us simpler and more cost effective.’

Homeowners turning to loans to fund green home improvements

A new survey from Barclays of 3,000 homeowners found that homeowners feel encouraged to make green home improvements they are made more affordable.

Scottish Power offer a financing plan for households wishing to install solar panels. 

Now Barclays also have a Greener Home Reward scheme which offers a cash reward of up to £2,000. 

When it comes to paying for green home improvements, trade body the Energy and Utilities Alliance has advised consumers to ‘stick some on the card’ if you are buying a heat pump. 

In other words, making purchases on a credit card offers consumers protection if something goes wrong.

 That is due to Section 75 of the Consumer Credit Act, which says if a consumer buys something on credit worth between £100 and £30,000, the lender and seller are equally liable to sort the problem out if something goes wrong. 

This post first appeared on Dailymail.co.uk