In this paper, crushed lava-based aggregate was used in mortar mix composition as a full silica sand substitution to improve thermal properties of mortar fulfilling also other physical, mechanical and technical requirements. As a binder, natural hydraulic lime was used. Workability of fresh mortar mixes was characterized by spread diameter. The casted samples were matured for 28 days in a high relative humidity to avoid cracking. For the hardened samples, structural, mechanical, and hygric properties were tested. Thermo-physical properties of the developed mortars were measured as function of moisture content, from the dry to fully water saturated state. The application of lava-based aggregate led to the mortar’s increased porosity, improved mechanical strength, lower water absorption, and significantly better thermal performance compared to the control materials with silica aggregate. The newly developed lightweight mortar met the technical, compatibility and functional criteria on rendering mortar and was found well usable for conservation and restoration of historical and heritage masonry and buildings.