Houses are no different to any other assets – they are worth what someone is willing to pay for it. At times people will believe their property is worth more than they can sell it for; at times people will pay much more than the owner believed the property was worth. Changes in supply and demand, the state of the local property market and wider economic factors all affect the value of homes. Now of course there are good deals and bad deals to be had but, on the whole, a property will be sold for an amount which accurately represents its value at the time of sale.
When it comes to the mortgage valuation, things can change a little. An independent professional called a surveyor is instructed by the mortgage lender to give their say on the property and whether it is suitable security – a mortgage is a loan secured against your home.
Now on a purchase application, the valuation process is simple. The purchase price you have agreed with the vendor is put down as the value of the property. A surveyor will then inspect the property and produce a valuation report to confirm whether the purchase price is an accurate reflection of the value, all things considered. There are two options here, the valuation report will either accept the value as the purchase price or they will “down-value”.
On a remortgage application, things can get a little more complicated. As remortgages are typically done a few and then many years after the property was purchased, the original purchase price and current value are likely no longer the same. When going to remortgage, it is important to think about what to put down as the value of your property as this affects the loan-to-value (LTV) which determines what interest rate you’ll be eligible for. Just as with a purchase, the new mortgage lender will instruct a surveyor to inspect the property and produce a valuation report.
For rate switch applications where you are staying with your current lender, they will normally use an indexed valuation to determine the value of your property for mortgage purposes.
If a property is down valued, it is likely to affect the amount you can borrow and/or the mortgage product you are able to apply for. For example, imagine you agreed on a purchase price of £500,000 and wanted an 80% mortgage of £400,000. If the bank then said the property was only worth £450,000, you would have two options:
- Continue to borrow 80%, now £360,000, and put an extra £40,000 deposit down to make up the difference, on top of the original £100,000
- Continue to borrow £400,000, now approx. 90%, and pay a higher interest rate for having a higher LTV mortgage
A down-valuation often leaves buyers in the position of needing to renegotiate or pull out of the purchase. Because of this, buyers often try and go back to the vendors and renegotiate a new purchase price. However, the chance of success doing this is dependent on how willing the vendor is to renegotiate having already made an informal agreement on the original purchase price.
For purchases, remortgages and rate switches there is normally an option to appeal your valuation if you have reasonable grounds to do so (eg: you’ve done an extension which hasn’t been considered by an index valuation). However, many banks do not allow an appeal unless the down-valuation is a specific percentage below what you believed it to be.
As frustrating as a down-valuation may be, the mortgage valuation process is a necessary control measure implemented by lenders. It ensures banks are lending responsibly, they are not over-exposed and it is a vital anti-money laundering measure.
As discussed in previous blogs, through the coronavirus pandemic the UK housing market came to a standstill and has since gone on to reach unprecedented volumes. Prices are at an all-time high with properties being in such demand, predominantly due to the cut in stamp duty land tax (SDLT). There has been much speculation, disagreement and uncertainty amongst industry experts regarding the sustainability of the current climate and immediate future of the housing market once stamp duty rates return to normal and the furlough scheme ends. How property prices will react and how banks valuations will change is yet to be truly seen.
It is worth noting that the latest recession we’ve come through was driven by a global pandemic and not financial markets. Therefore, the current economic landscape bears much less resemblance to the 2008 financial crisis and subsequent property crash than some may have you believe.