Why use cash to buy solar – when you can have low-interest finance?
When researching solar finance, you will find a number of suitable options.
Households are increasingly turning to finance to purchase high-quality solar products. Financing your solar power installation allows you to buy your system without having to pay the associated costs upfront.
With interest rates at an all-time low, it is becoming more appealing for customers to use financing to purchase or upgrade their existing solar power systems.
What to consider when deciding about solar & battery financing
Depending on the household’s specific situation, the best solar financing product will differ for each individual family or company.
However, it is important that people find a renewable energy finance solution that works well for them.
When looking for solar energy loans or financial products, make sure you find one that fits your borrower profile and has payment options that work for you.
“When it comes to financing your solar power system, the safest and most cost-effective option is a government-backed Green Loan, which is specifically designed for those looking to invest in green projects. Green loans are low-interest personal loans offered by finance companies that are typically concerned with the community and the environment”, Don Quattrocchi, the Managing Director of DQ Solar and Electrical.
Green personal loans typically have interest rates that are similar to those of a new mortgage, as long as the funds are used for solar or energy-saving reasons.
Users can usually spread the payments over 1 to 7 years with lower maintenance fees and little to no ongoing fees or penalties for early repayment.
However, if you look very carefully, you could indeed find a green loan with a seemingly low-interest rate, longer-term options, a reduced-up front fee, and no continuing or early repayment fees.
Plenti, previously known as Ratesetter is a well-known and reputable name in the market, offering low-interest loans for green projects or energy-efficient products.
Plenti’s Green Loan, which is backed by the Clean Energy Finance Corporation, offers low-interest rates starting at 6.9 percent per year.
Furthermore, one should consider that some Australian State Governments offer financial support for energy-efficient acquisitions such as solar and/or solar battery storage typically in the form of interest-free or low-interest loans.
Victoria and South Australian State Governments are currently leaders in this field.
Not only this, but It is also not surprising that the trend of advertising ‘Interest free’ in Adelaide is becoming more popular among lenders and companies offering personal loans.
While ‘Interest-free’ is a powerful phrase that piques the interest of those looking to borrow, however, in many cases, the cost that someone does not pay in interest is hidden in other costs, like the upfront cost of the system.
So we suggest you stay a little sceptical when someone promises interest-free, as maybe they are using cheap solar panels and inverter solutions, then bump up the price to absorb the interest component, and then offer the bundle as “Interest-Free”.
Do pay-as-you-save energy-saving schemes work?
Pay As You Save (PAYS) is an economic mechanism that enables an energy supply company (utility) to pay for both the upfront cost of a distributed energy solution and recover the cost on the monthly bill with a charge which is less than the estimated savings.
The customer experiences positive cash flow at the beginning of the procedure, but once the utility recovers its costs, the solar power system can be transferred to the consumer.
The marketed goal of a “pay as you save” is to improve the energy performance of the private housing sector and to ensure that consumers benefit from lower electricity prices.
Other benefits mentioned in marketing material include the raising of the country’s energy security by reducing consumption of fossil fuels and the reduction of carbon levels which helps the environment.
The increased use of solar power will reduce the consumption of fossil fuels in years to come
In theory, ‘Pay As You Save’ for solar and batteries is a fantastic business strategy because installing a solar system should save you money based on your current quarterly bill expense.
The drawback with this scheme is often the energy retailers offering such schemes use the lower quality solar gear, to make sure payback is soon and profit is maximised.
So when the customer then at the end takes over the solar system, often via a lump sum payout, the system will be close to the end of their life, meaning the customer will face breakdowns and outages soon after taking over the ownership.
That’s the reason for long-term solutions – it pays to go for quality solar gear.
Energy-saving measures for your home
Customers when considering solar also sometimes have energy-saving measures installed, like insulation, double glazing on windows, or a new hot water heating system.
These bundled measures will result in reduced energy consumption patterns and, as a result, reduced energy bills.
If you are a private landlord, the concept would be that a new and well-functioning energy-efficient property will attract higher rental income, thus repaying the loan on the energy-efficient equipment over time.
However, prior to actually entering into some kind of loan agreement, it is critical to consider any possible variables that can influence your spending plan or ability to afford regular loan repayments such as:
- Using more power than what was produced, as the tenant now thinks solar is a magic pudding.
- A drop in the solar feed-in tariff- resulting in a reduced income stream.
If these variables are not taken into account from the start, borrowers may find themselves unable to stick to the planned budget as they will be surprised by unanticipated extra costs or higher electricity bills than expected.
“After more than a decade of solar installations in Adelaide suburbs like St Peters, Unley and Salisbury it has become clear that installing a solar system will be a solid financial investment”, says Don Quattrocchi, the owner of DQ Solar and Electrical.
“With an average payback period of three to four years, in our low-interest environment represents an over 20% return on the investment, possibly for decades, if one of our quality PV systems was chosen. Nothing can beat that,” he added.
To work out the proper ROI on your system, there is a good ROI calculator on the LG energy website.
Caution regarding “No interest, buy now, pay later”
As mentioned previously your “be careful” detector should go off if you see a finance deal that claims, ‘no interest.’
When it comes to 0 percent Buy Now Pay Later (BNPL) loans, approximately 15-25 percent of the amount you pay actually goes to the finance BNPL provider rather than the solar installer.
In recent years, the growth of BNPL (Buy Now, Pay Later) products has exploded, with products such as Afterpay, and Brighte available in Australia.
The issue with all these product lines is how they are advertised to the end-user, with catchy phrases such as “No Interest Ever.”
The consumer invariably pays because, from experience, systems offered with Buy Now Pay Later plans either have lower quality componentry or a higher purchase price than an equivalent self-funded system.
The primary reason these products are used is to entice the buyer to make a purchase, and it is sometimes used as a tactic to entice vulnerable customers to buy a product.
Solar installers who use this type of financing can take advantage of most consumers’ difficulty distinguishing between solar brands to portray something which appears better than it is.
The very first area where these expenses are soaked up is the products, which usually means that the consumer will take a lower quality product than what they expected and were guided to via the marketing hype.
Another major route is to reduce installation and cost of labour, which can lead to poor installation practices and inferior solar safety components being used to finish a solar system installation.
Furthermore, Interest-free loans have always been a way for sellers to capitalise on the shortcuts we all use when making choices, particularly when it comes to new tech or branded products, we are unfamiliar with.
It may sound too good to pass up, however, before you do, it is recommended that you do your homework and compare your financing options.
Residential solar power systems in Adelaide for residential homes can have a pay back as low as 3 to 4 years.
What are the top 3 residential solar finance options?
- Green Loans – as explored before, Green loans are low-interest personal lending provided by financial companies that are typically concerned with the community and the environment.
The products you can buy with a green loan vary depending on the lender, but in general, it can be used to buy products that are more efficient in terms of energy or water consumption, reduce your dependence on the grid, or cut emissions.
Aside from the loan’s purpose, the eligibility criteria for green loans are typically similar to those for other credit products.
When you apply, the lender will consider your income, credit history, whether you are an Australian citizen/resident, and whether you have filed for bankruptcy.
You will most likely be required to provide the lender with your personal information, including your address and phone number, as well as proof of your income, employment status, assets, and debts, as well as information on how you intend to use the loan.
Thus, this is a convenient way to obtain finance for solar, specifically for those who have a good credit history.
- Redrawing an existing mortgage is possibly the most popular and safe way to finance solar and batteries, as in this low-interest-rate environment the homeowner can negotiate the best purchase price, as he/she will be treated like a cash-paying customer.
Furthermore, as the solar system purchaser knows the repayment costs/interest rate, this new expenditure can be inserted in the monthly budget planning and therefore does not create sudden surprises.
As of June 2021, the average variable home mortgage interest rate is in many instances below 3% and on average 3% to 4%. Using the example above, we can analyse that it might be better if you borrow against your home to invest in a solar system rather than paying into the mortgage and lowering your mortgage payment.
However, there is a risk, because if the homeowner is not disciplined, and for example only chooses to make minimum payments, when one factor in the interest over time, the overall cost of your solar system could increase substantially.
Thus, before making a decision, take the calculated cost of a home loan versus a short-term solar loan, which forces you to make regular payments.
Be wary of large application or variability fees, as well as any effect on the lender’s mortgage insurance.
Finally, this option is most comfortable for those with a high level of property equity who do have the financial ability to pay off their mortgage as quickly as possible.
- Cash – If you really are debt-free and trying to find a place to put your money, investing in a solar PV system will outperform many other investment opportunities.
Solar systems effectively generate a higher tax-free return than current interest rates or government bonds.
Considering a top-quality 6.6kW solar power system purchased for roughly $8,000 would pay itself off in around 4 years, that will see a return of 25% per annum.
If you are not home during the day, especially on sunny days, the returns will not be as strong, as you will have to rely on the feed-in tariff (FIT) for your income stream.
In many parts of Adelaide, this FIT will generate around 5 to 12c per kWh in income, for the exported electricity. However, the ROI will still be around 5 years or 20% return on investment.
In such a situation, it will then be worthwhile to explore a solar and battery combo. Such a renewable energy system will see the ROI slip to around 7 years.
This increase in ROI is because of the still relatively high cost of batteries. Such a combination system will still generate a respectable 14% ROI in places like Adelaide and other parts of SA, after the system has been paid off.
Battery and solar combinations now have a ROI of less than 7 years in many instances.
Then there is the added benefit to still have power in the house when there is a blackout and setting the stage to make your house energy independent, ready for when electric vehicles and EV charging become a must-have feature of homes.
Final summary regarding financing your solar system
For many consumers, with average or above electricity bills financing the purchase of solar and battery systems makes sense economically.
Make sure that the finance you obtain is managed and that you understand any hidden costs.
When researching finance for your solar power system keep an eye out for setup fees, additional payments, and early repayment fees, which can add a significant amount to the overall cost of your system.
Make sure your minimum monthly payments can be afforded within your household budget.
Also read in detail all the conditions, fees and charges associated with your finance option. Interest free promotions also deserve a close inspection, as sometimes they have a hidden sting in the tail when the promotion period has ended.
Make sure you agree on the loan terms and conditions, for example, 5 years, and that you can pay out the solar loan early. It is an advantage if your repayments can be less than your old power bills, as in this case, the solar literally can pay for itself.
Other issues to consider are specific payment plans that have no flexibility in changing payment structure.
Also never put the cost of a solar system on a credit card. Even right now with low-interest rates, credit card interest rates can still be as high as 17%.
Interest-free offers linked with credit cards can turn to high-interest costs when the interest-free period has run out.
Go for offers that can give you equal monthly payments with no surprises during the loan term.
When choosing the equipment and installation company, choose a local solar installation company that has been in business for many years.
The reason is that when in future years you plan a solar and battery system expansion, the original installation company, such as DQ Solar and Electrical will be around to service and supply the new system.
DQ Solar and Electrical has been the local, trusted solar installation in Adelaide for over a decade.
Please be aware of the ‘Interest-free’ financing options that are constantly offered – especially by the cheaper end of the solar market, making sure you understand that just like any other purchase, interest-free means that the full picture is not necessarily being presented to you.
Finally, this blog should not be considered ‘financial advice’, however, if followed it may allow you to gain further insight into financially smart ways to finance your purchase of a renewable energy system or other energy efficiency products.
To find out more contact DQ Solar on (08) 7160 0127.