What’s The Best Way To Finance A New Solar System?

By Finn Peacock – Chartered Electrical Engineer, Ex-CSIRO, Founder of SolarQuotes

Let’s be honest. Although solar power can provide you with the security of low electricity bills for decades, it has one big challenge:

Finance – how do you find the cash to buy it?

A decent-sized (6.6kW), good quality home solar power system can cost north of $6,000. That’s a big chunk of change to find.

The solution – of course – is to buy a solar system on credit, or finance.

Although we all like the thought of tiny power bills, we are also very wary of getting into debt; and so we should be. Debt incurs interest, which adds to our living expenses. I personally try and avoid it wherever possible.

But solar finance is different. If it is used thoughtfully, a well financed, properly sized solar system can save you more money every month than it costs you to finance. Yes – even including interest.

However, you need to shop around, not just for the solar panel system, but for the best finance. The difference between solar saving you money each month and costing you will mostly come down to the deal you can get.

A word of caution on “No Interest” Buy now, Pay Later

If you see a finance deal that claims ‘no interest’ your BS detector should be going off.

All finance has a cost – when it comes to 0% Buy Now Pay Later (BNPL), around 15-25% of the price you pay goes directly to the BNPL provider instead of the solar installer.

On an $8,000 solar purchase with 0% finance, the solar provider might only receive $6,000.

Invariably the consumer pays because, in our experience, systems that are offered with Buy Now Pay Later plans either come with inferior quality componentry or a higher retail price than a comparable self-funded system.

Solar installers who use this sort of finance can take advantage of the difficulty most consumers have differentiating solar brands in order to present something that looks better than it is. We all know that a Mercedes sedan is worth more than a Toyota, but you mightn’t know the difference between Tindo and Longi solar panels.

You can get a much better deal overall by organising your finance independently and avoiding the easy-sign-up, ‘no interest’ deals. Learn more about the tricks and traps of BNPL solar here.

Interest free loans have long been a way merchants can take advantage of the mental shortcuts we all take when making decisions, especially about technology or brands we know little about. It can sound too good not to take up, but before you do we recommend you do the research first and compare your finance options.

Here are six common ways to finance a solar power system:

1. Green Loans

Green loans are very low rate personal loans offered by financial institutions who are typically interested in helping the environment and the community.

Green personal loans usually have interest rates more closely resembling your home loan, as long as you are using the funds for solar or energy saving purposes (think solar, double glazed windows and energy efficient air conditioning). You can usually spread your payments over 1 to 7 years with low setup and low to no ongoing fees or early repayment penalties.

If you’ve decided to not spend your cash, then the next best option for most is a green personal loan.

Setting up a new loan, whether it’s an addition to your mortgage or a green loan, attracts a banker’s best friend – fees. Watch out for establishment fees, monthly fees and early repayment fees that can add a significant amount to the total cost of your system.

But if you look carefully, you can find a green loan with a low interest rate, long term options, low up front fee, no ongoing and no early repayments fees.

Who are green loans best for? Most people who don’t have bad credit.

Tip: For zero out of pocket monthly expenses, speak to your finance provider about balancing estimated solar savings with a loan term to match the repayments.

2. Cash

“Cash is not finance!”, I hear you say. But in order to compare the different financing options, you must compare them to the old fashioned way of buying things – with cash.

If you are debt-free and have cash looking for a place to go, then investing in a solar power system will will give many other investments a run for their money. Solar systems currently generate a tax-free return that is higher than current bank interest rates or government bonds.

If you use most of your electricity during the day, a 6.6kW system purchased for $6,500 will generally pay for itself in around five years. That’s a return of 12% per annum. If you’re not home during the day then the returns won’t be as spectacular, but likely still above bank interest rates.

Who should consider paying cash? Anyone who has the savings and in particular cashed-up, debt-free retirees who want a higher return on their nest egg without taking undue risk.

Tip: When comparing solar power with other investments, remember you can’t tax savings.

3. Add to your home mortgage

Retail mortgage rates are averaging around 6.9% as at early October 2023. Considering the 12% return from home solar panels in the example above, you could be better off borrowing more against your home to invest in a solar system than to reduce your mortgage.

The only challenge with financing solar power via your mortgage is an age-old one – people invariably stick to the minimum repayment.

If you plan to pay off your mortgage over 25 years, then the cost of your solar system could end up being almost double, once you take into account interest over time.

Before you decide, you should compare the total cost of a home loan versus a short term solar loan. Be careful of big application or variation fees and any impact it might have on lender’s mortgage insurance.

Who is this best for? Homeowners who have the financial discipline to pay off their mortgage as fast as possible. If you have an offset facility or redraw as part of your mortgage, then you can add the cost of a solar power system to your mortgage without incurring substantial fees that come with a new loan.

Tip: Commit to paying more than the minimum repayment amount with your solar energy savings and see your home loan pay down faster.

4. Rent to own/solar leasing

With this option, the leasing company owns the system until you fully pay for it over the term of the ‘lease’. Unlike leasing a car, the solar power system can not be easily removed from your house and leased to someone else.

If you decide to sell your house you will need to pay the outstanding balance of the loan because the contract cannot be transferred to the new property owner.

The solar leasing salesperson will tout “just pay a simple monthly fee, which is often less than your current electricity bill.” In theory you come out ahead, but beware of the actual interest rate that is baked into the monthly lease.

Compare the cash price of the system you are buying to the total amount you will pay over the term of the lease. The difference is in effect the interest you pay to enjoy the benefits of solar energy now while paying later. Don’t be fooled by the low monthly payments that are in theory covered by the energy savings from solar panels.

Who is rent to own/solar leasing best for? We only recommend this type of financing for larger solar systems, typically put on commercial premises.

Tip: Always compare the total cost of every finance option you are considering. Repayments for a long term solar loan may well be as low as the lease payments.

5. Power Purchase Agreements (PPAs)

The idea is you get the system installed for no upfront cost, then pay the solar company for the electricity a system generates. For example, they could charge you 20c per kilowatt-hour of solar electricity generated compared to the 30c you typically pay for grid electricity.

Sounds like a no-brainer, right? Unfortunately, there is one flaw. Under a PPA, you are contractually obligated to buy a set minimum amount of electricity from the retailer, regardless of whether or not you actually need it in your home. This means you could potentially be paying for energy that you don’t need.

Solar PPA’s are popular are for commercial properties and factories that use loads of electricity during the day, which means almost all the solar electricity is used on-site. But unless you own a factory, PPAs are probably not a good solution.

Who is PPA best for? We only recommend this type of financing for larger solar power systems, typically installed at commercial premises.

Tip: If you run a home business that uses a considerable amount of electricity through the day, seven days a week, then a PPA may be suitable for you. Just be sure to check your electricity consumption patterns to be certain you will come out ahead.

6. Personal Loan

A finance company can help those who can’t borrow more on their home mortgage, or want the added incentive of a higher interest rate to ensure they repay the loan faster. If you don’t have the discipline to repay more than your minimum repayments, then a personal loan may work out as a cheaper option in spite of the higher interest rates.

Similar to green loans, some lenders will factor the loan purpose, your home ownership status and other aspects, and may offer better than market interest rates.

A finance company will pre-approve your loan, allowing you to negotiate as a cash buyer and ensuring you can get the best system for your money. If you decide to sell your property, then the loan is unaffected as it is guaranteed by you personally and not tied to your house.

Who is a personal loan best for? Those with good credit who want the flexibility to fund items other than solar, a competitive interest rate, and the negotiating power of a cash buyer.

Tip: Your bank typically won’t offer a competitive interest rate because their pricing is one-size-fits-all. This means you could be paying the same rate as the 19 year old student borrowing the cash to go backpacking around South America. An exception: at time of writing the CBA offers a special rate to mortgage holders if borrowing to buy solar/batteries.

My service can connect you with good solar installers able to assist with various forms of finance. You’ll get expert advice on a system right for your circumstances and a quality installation; backed by the SolarQuotes Good Installer Guarantee.

When you request quotes from my service, we’ll also ask you whether you’re interested in a green loan or other finance for your system. If so, you’ll be able to select up to three trusted finance providers to present you with options tailored to your circumstances, obligation-free.