A mortgage down valuation can be a frustrating element of any mortgage purchase or remortgage. Ultimately, the value of a property is the amount someone is prepared to pay for it. However, lenders need to set their own independent value on an asset they plan to lend against and, even if you have successfully negotiated a property purchase or sale with someone, in most cases you still have to wait for the mortgage company to value the property. Often the report agrees with the sale price and the mortgage application moves forward – but what if the valuation price comes back lower than the purchase price? This is otherwise known as a “mortgage down valuation”, but before we explore the maths behind this frustrating but all too common phenomenon, it’s worth understanding more about how the mortgage valuation process works, what the options are and why they are carried out in the way that they are.
The precise term for this process is a mortgage valuation yet, clients and brokers alike (I too am guilty of this!) often refer to these as surveys. However, a survey is something that is carried out for the benefit of the client and so will consider the property as a whole and the factors that would be important to them, such as the strength of the structure, the utilities available or weatherproofing just to name a few. The mortgage valuation is far simpler than a typical client survey, most often known as a “homebuyers report”. It’s typically no more than two pages in length and has a number of tick boxes to confirm the property’s integrity, utilities, size and construction methods. Of course, the surveyor will also include their estimated valuation. This is usually determined by finding other similar property sales, ideally within quarter-mile radius and within the last three months but, at the very most, these can be over a half-mile radius or over six months depending on the turnover of properties in the area or the density of property.
This stage can often be the root of a few problems. For instance, you might have the most beautifully decorated and styled home, but if several run-down but comparatively sized properties have sold recently for a lower value, they are going to result in a mortgage down valuation. Conversely, a very well thought out and styled home may sell very quickly and be in great demand, which could lead to a higher than average selling price, but there is no guarantee that the market value will be the same. There are a great number of resources that can help clients understand more about the values of properties. We wrote about a few here.
To further aggravate the situation, a separate company to the lender generally employs the property surveyor and, as a result, the lender has no choice but to take the surveyor’s word for it. For example, if you disagree with the resulting mortgage down valuation there is little that can be done. There are appeals processes, however after six years in the industry and witnessing countless appeals, I’ve never seen one overturned. The reason for this is quite simple. When a surveyor visits a property they get paid, they write the report and move on. If they have to deal with an appeal they are not getting any extra money for that work, which may involve a repeat visit to the property. Every appeal that is successful will not only underline the fact that they were wrong in the first place, but also incentivise a broker or client to appeal other results from the same surveyor. Lenders also want surveyors who get these things right. A change in the valuation as a result of an appeal means that these surveyors have to do more work for the same money, have to encourage more appeals and are given less work in the future. As you can imagine, that is not going to keep them (the surveyor) in business for very long.
So a “down valuation” may not take into account some of the features that made the property appealing to you or to the people buying it, and if there is little chance of recourse, what does it mean for the mortgage application? It all depends on the mortgage Loan to Value (or LTV) that is being applied to the mortgage application. Essentially, the LTV is a percentage of the amount of loan being borrowed compared to the value of the property (calculated by looking at which is lowest between the purchase price and the mortgage valuation result).For instance, a property being bought at £120,000 with a mortgage of £60,000 is at an LTV of 50% – the mortgage is 50% of the value. If the mortgage valuation comes back at £80,000, this figure is recalculated by the lender and the LTV then becomes 75%. The Loan to Value is one of the key risk factors that lenders take into consideration and will affect many things on your application.
For example, if a buyer does not repay the loan, the court can repossess and the property can be sold to pay off the loan. Repossessions are expensive. If for instance the average amount recovered by the bank was 85% of their loan, then customers borrowing over 85% of the property value are more likely to leave them out of pocket than those borrowing below this threshold. This is why pricing is tiered based on the Loan to Value. As a result, you can expect your rates to increase when the lender recalculates your LTV from 50% to 75%. As a further complication, the lender may have based the amount you can borrow on this LTV. An increase in your LTV percentage may cause the loan amount available to you to decrease. The credit scoring system may also have used this as a factor in the decision. It’s quite possible that increasing the LTV from 50% to 75% would turn an application that was agreed into one that would now be declined
The examples used above are extreme to illustrate the difference clearly. The reality may well be less severe, but what happens when you are borrowing at the highest LTV the lender offers, such as at 90%? If this were the case, then you may simply have to accept that you will only be able to borrow 90% of what the lender thinks the house is worth. In this instance, the first thing you may want to do is re-negotiate with the vendor. After all, any other buyer would be facing the same problem sooner or later. Any decrease in the agreed purchase price will reduce the burden on the buyer but, if they won’t reduce it in line with the mortgage valuation, the buyer will have to increase the deposit to match the difference between 90% of the mortgage valuation and the agreed purchase price. In the example above, 90% of £80,000 would be £72,000. An initial deposit of £12,000 would then become a huge 48,000! This is another extreme example, but the effects are clear.
Finally, buyers be wary when paying over the asking price. Just because something is desirable to you, does not mean it will be considered desirable to the mortgage lender. If you are selling a home this is also important to consider as it’s likely that your buyer will be using a mortgage. Understand the market value and consider how much deposit the buyer has; if they are stretched thin and paying over the odds it there might be trouble ahead.
Here at AALTO Mortgage and Property Solutions we are very experienced in dealing with lenders and surveyors who have right tools to estimate prices. If you have any doubts speak to us first before making an offer and we can give you some advice. Remember we are completely broker fee free as we simply take the commission from the lender.
Your home may be repossessed if you do not keep up repayments on your mortgage.