What are the different ways to finance a solar power system at home?

If you don’t have enough savings to pay for a solar energy system upfront, you may apply for a personal loan or consider using the equity in your home for borrowing money. 

Equity is the difference between your property’s value and the amount outstanding on your home loan. Some lenders allow you to use the equity in your property as security to borrow money.

You may use a home equity loan to install a solar system, make renovations to your property, or even pay for a holiday. Lenders don’t generally enquire into the purpose of a home equity loan. Still, some lenders might ask for more information than others. Depending on your lender, it's also possible to add the cost of solar to your mortgage or refinance your home loan to increase your borrowing capacity.

If you don’t want to use your home equity, you may consider other finance options. These include:

Green loans

A green loan allows you to borrow money for various purposes the lender considers to be environment-friendly. For example, you can get an unsecured personal loan to purchase solar panels for your house. Some lenders also allow existing mortgage holders to borrow fixed sums of money to buy and install clean energy products in the security property. For example, the CBA Green Loan lets you borrow between $5,000 and $20,000 to purchase and install various clean energy products.  

Some of the products you may be able to purchase using a green loan include:

• Solar panels, hot water systems, or battery systems
• Eco-friendly vehicle
• Insulation
• Energy-efficient appliances like heaters and air-conditioners
• Double glazing for your windows 
• Water tanks
• Grey water treatment system 

One of the top reasons you may consider a green energy loan is the low interest rate and fees. It’s also possible to choose a convenient term between one to five years for a green loan. There’s usually no penalty if you wish to pay back the loan before the expiry of the full term.

On the downside, eligible products you can purchase using a green loan may vary between lenders. There could also be additional specifications in terms of the products you are able to buy. Thus, it’s worth checking whether the item you have in mind matches the lender’s criteria before filling out an application for credit. 

Interest-free solar loans

Some solar suppliers advertise interest-free solar loans that might sound too good to be true. If you’re considering a similar option, make sure you look at the total price you’re paying for the system. While interest-free loans might not include interest, suppliers often increase the quoted price to cover their costs. As a result, you could end up paying considerably more even without making any interest payments. Homeowners mostly consider this option if they have a low credit score, as the eligibility criteria for no interest solar loans are often more relaxed than green or personal loans. 

Personal loans

If your credit score is good, it’s also possible to use a personal loan for financing your solar power system. The interest rate on a personal loan is likely to be higher than a green loan, but it doesn’t limit your options by specifying the products you can buy.  

Solar leasing

Solar leasing is slowly becoming popular even though it is sometimes slightly more expensive than paying for solar upfront. In a solar leasing plan, a solar supplier installs the panels on your home and you make monthly repayments on the system for a period of five to 10 years. You also pay interest on these repayments according to the terms of your lease. However, the maintenance of the system is the company’s responsibility during this period, which could be a major expense at times. Most solar leasing agreements also include a ‘rent to own’ clause, which means you own the panels by the end of the lease.  

Solar power purchase arrangements

Under a solar power purchase arrangement (solar PPA), you can have solar panels installed on your roof for free. However, these panels will continue to be owned by the supplier, and you’ll be purchasing the solar power produced from these panels at a lesser rate than what you’d pay from the grid. 

While PPAs became quite popular when they were introduced, there are some downsides you should be aware of. For example, some PPAs increase the price you pay for the electricity generated by your system over the life of the lease. Therefore, it’s important to dedicate enough time to negotiate a fair contract with a supplier. PPAs are also considered more suitable for commercial premises than residential homes. 

Overall, the best way to finance solar depends on your personal situation. A green loan is often the preferred option for solar finance. However, you may consider a solar lease or another arrangement if your credit score is low. Also, keep in mind that your savings are not guaranteed when you switch to solar. Therefore, it’s only advisable to borrow money when you’re sure you can afford to repay it, with or without the savings on your energy bill.