Heat pump loan and grant: the full maths

The choice people frame as heat pump loan vs grant is a false one. The two were built to be used together, in a set order. You take the £7,500 Boiler Upgrade Scheme grant against the installer's invoice first, which shrinks the bill, then borrow only the leftover balance on the Warm Homes Loan at its reduced rate. Grant first, loan for the rest. On a typical air source job that is the difference between a five-figure lump you cannot find and a repayment about the size of a phone and broadband bill.

So this is not a page about picking one. It is a page about the order, and the numbers that fall out of it.

Why it is grant first, then loan

The two pots do different jobs. The Boiler Upgrade Scheme grant is capital: a fixed £7,500 that your Microgeneration Certification Scheme installer claims and knocks straight off your quote before you pay a penny. The Warm Homes Loan is finance: money you borrow and repay, for the part the grant does not reach. One lowers the price. The other spreads what is left.

Neither pot is means-tested the way the insulation grants are, so most owner-occupiers and private landlords can use both. What sets your monthly cost is not who you are. It is how much is left once the grant has come off the quote, and how long you take to repay it.

That is why the sequence matters. If you borrowed the full install cost and then claimed the grant, you would be paying interest on money you did not need to borrow. Claim the grant first and the loan is written against the smaller balance, so you borrow less and pay interest on less. The heat pump grants page walks through how the Boiler Upgrade Scheme claim is made, and it is your installer, not you, who lodges it.

There is a second discount hiding inside the loan itself. The scheme pays the approved lender a grant of up to 20% of the loan, which reduces the sum they charge interest on. You never see that money. You feel it as a rate up to around 5 percentage points below a standard home improvement loan. So two grants are working at once: one on the price, one on the borrowing.

The worked example, step by step

Take a straightforward air source heat pump for an average family home. The Energy Saving Trust puts a typical install at around £12,000, and that figure already includes the plumbing, wiring and any radiator upgrades a heat pump needs to run well. Here is what happens to it.

The two monthly figures are illustrative. They assume a reduced rate of an illustrative 5% APR, roughly what the scheme's rate cut is designed to bring a heat pump loan down to, and they are worked from the £4,500 balance rather than quoted by any lender. The exact number depends on the rate your approved lender offers and the term you pick. Run your own figures on the loan calculator before you commit to anything.

What the example shows is the shape of the deal. A around £12,000 job stops looking like that the moment the grant lands, and the slice you borrow is small enough that the term does most of the work in setting your monthly cost.

Not every install lands at that figure. A larger or harder-to-heat home, or a ground source system instead of air source, pushes the cost up, while the grant stays fixed at £7,500, so the balance you finance grows with it. The loan caps leave room for that: an air source system is covered to £20,000 and a ground source one to £35,000. The method does not change. Only the size of the slice you borrow.

Why the loan rate sits below a normal loan

A high street home improvement loan of a few thousand pounds is unsecured, so the rate reflects the lender's risk. The Warm Homes Loan is different because the government is standing behind part of it. That up to 20% grant to the lender lowers their exposure, and the saving is passed to you as a cheaper headline rate.

It also means the rate is set by the scheme's design rather than by your credit file alone, though lenders still run their usual affordability checks. On a small balance like £4,500 the rate gap is worth less in pounds than it would be on a £20,000 borrow, but it still counts, and it is free. There is no downside to taking the cheaper money once you have decided to borrow at all. You can compare the monthly cost of a heat pump against your current gas or oil bills on the heat pump calculator, which is the comparison that actually decides whether the sums work for your house.

Choosing the term: fast and dear, or slow and easy

The loan runs over 3 to 10 year terms, and that single choice moves the monthly figure more than anything else on a balance this size. Short term, higher payment, less interest overall. Long term, lower payment, more interest overall. Neither is wrong.

On a balance this small the gap in total interest is modest in absolute terms. Over five years you might pay a few hundred pounds; over ten, a little more. Set that against a heat pump that can trim hundreds a year off a gas or oil bill, and the longer term often carries itself. The thing to avoid is defaulting to the longest term just because the monthly headline looks the kindest. Choose it on purpose.

The honest way to pick is to work backwards from what fits your monthly budget, then check the total. On our worked £4,500, five years costs you a little more each month but clears the debt while the heat pump is still new. Ten years nearly halves the payment. If your gas bill was already north of that figure, the heat pump is close to paying for its own finance from the savings it makes, which is the real point of doing the maths this way round. The Warm Homes Loan Scheme guide sets out the eligibility and the full caps behind these numbers.

Common questions

The number that decides everything is the balance after the grant, not the sticker price on the quote. Work out that figure for your own install, then pick the term that lands the monthly payment where your budget already sits. The funding wizard pulls the grant and the loan together and shows you the balance and the repayment side by side, so you can see the real cost before you speak to a single installer or lender.