Property valuations are often associated with problems. If a mortgage lender values a property below the price a buyer has agreed to pay, it can reduce the amount they are prepared to lend and potentially leave the buyer with a funding shortfall. But sometimes, a mortgage valuation can work in the buyer’s favour.
That’s exactly what happened to two of our clients purchasing a property in Scotland. The property had a Home Report valuation of £200,000, but our clients had agreed to pay above that figure. When the mortgage lender assessed the property, however, it valued the home significantly higher than the original Home Report valuation.
The result? Our clients’ mortgage moved from a 95% loan-to-value (LTV) product to an 85% LTV product, reducing their mortgage payments by approximately £75 per month. Here’s what happened.
Quick Answer
A higher mortgage valuation improved our clients’ loan-to-value from 95% to 85%. This gave them access to a different mortgage product and reduced their monthly mortgage payment by approximately £75, or around £900 per year.
The Clients
Our clients were purchasing a residential property in Scotland. The property had originally been valued through the Scottish Home Report process at £200,000.
However, the clients had agreed to purchase the property for more than the Home Report valuation. This meant they were initially looking at a mortgage based around a 95% loan-to-value product, with only a relatively small amount of equity in the transaction.
Buying A Property Above The Home Report Valuation In Scotland
The property buying process in Scotland differs from the rest of the UK in several ways, including the use of a Home Report.
A Home Report provides prospective buyers with important information about a property before they purchase it, including a valuation. In competitive parts of the Scottish property market, however, buyers may offer more than the Home Report valuation to secure a property.
Buying above the Home Report valuation can have mortgage implications, because the amount a buyer agrees to pay and the value used for mortgage lending purposes are not necessarily the same figure.
The Mortgage Valuation Changed Everything
As part of the mortgage application, the property was assessed for lending purposes.
The mortgage valuation came back approximately £26,000 higher than the original £200,000 Home Report valuation.
This change had a significant impact on the mortgage.
Crucially, the higher valuation improved the clients’ loan-to-value position.
Instead of requiring a:
95% LTV mortgage
the new valuation meant the case fell within an:
85% LTV mortgage bracket.
The higher valuation moved the case from a 95% LTV product into an 85% LTV bracket, opening up a different range of mortgage products.
Why Does Loan-To-Value Matter?
Loan-to-value, usually shortened to LTV, is the percentage of a property’s value that you are borrowing through a mortgage.
For example, if a property is worth £200,000 and you borrow £190,000, your mortgage would represent 95% of the property’s value, giving you a 95% LTV.
LTV is important because mortgage lenders commonly offer different products at different loan-to-value bands, such as:
- 95% LTV
- 90% LTV
- 85% LTV
- 80% LTV
- 75% LTV
- 60% LTV
Generally, having a lower LTV can give a borrower access to a wider choice of mortgage products and potentially more competitive interest rates.
That is why a change in property valuation can have a much bigger impact than buyers initially expect.
Moving From A 95% LTV To An 85% LTV Mortgage
In our clients’ case, the higher property valuation was particularly valuable because it moved their mortgage into a completely different LTV bracket.
Rather than simply proceeding with the original mortgage arrangement, we were able to account for the revised valuation and look at the mortgage products available at 85% LTV.
The new mortgage product reduced their monthly mortgage payment by approximately:
£75 per month
That’s around:
£900 per year
in lower mortgage payments, assuming the monthly difference remained the same. For buyers already budgeting for mortgage payments, household bills, insurance and the other costs associated with owning a home, that was a welcome result.
The Protection Benefit
Our clients were also arranging protection alongside their mortgage. Importantly, the clients were already planning to take out appropriate protection; the mortgage saving wasn’t what made that possible. However, the approximately £75 monthly reduction in their mortgage payment was broadly equivalent to the monthly cost of the protection they were already arranging.
In practical terms, the improved mortgage position meant that the saving on their mortgage effectively offset the cost of putting protection in place. For us, that’s a good example of why mortgage and protection advice shouldn’t necessarily be looked at as two completely separate conversations. A change to the mortgage can have an impact on the client’s wider monthly household budget.
Can A Higher Property Valuation Reduce Your Mortgage Rate?
Potentially, yes. A higher property valuation can improve your loan-to-value ratio, which may give you access to mortgage products available at a lower LTV.
Mortgage pricing is often linked to LTV. A lender taking on a mortgage at 95% LTV has much less of an equity buffer than it would on the same property at 85% LTV.
As a result, mortgage products at higher LTVs can sometimes come with higher interest rates than products available to borrowers with more equity.
Moving into a lower LTV band can therefore potentially give borrowers access to different mortgage rates and products. However, a higher valuation won’t always result in a lower rate or monthly payment. The outcome will depend on the lender, mortgage amount, available products and the borrower’s individual circumstances.
Can A Mortgage Valuation Be Higher Than The Home Report In Scotland?
Yes, a mortgage valuation can differ from the valuation shown in a Scottish Home Report. The Home Report valuation, the price a buyer agrees to pay and the valuation used by a mortgage lender can potentially differ.
If a mortgage valuation is higher than expected, it may affect the loan-to-value calculation and the mortgage products available. However, borrowers shouldn’t assume that a higher valuation will automatically allow them to borrow more or reduce their mortgage rate. How the valuation is treated will depend on the lender’s criteria and the individual transaction.
In our clients’ case, the revised valuation had a particularly useful effect because it moved their mortgage into a lower LTV bracket.
Oportfolio Insight
Most buyers understandably worry about a property being down-valued by their mortgage lender. But this case demonstrates the opposite scenario.
The property valuation improved the clients’ mortgage position enough to move them from a 95% LTV product to an 85% LTV product.
The important part wasn’t simply that the property was worth more. It was recognising what that new valuation meant for the mortgage products available to the clients.
That’s why we review changes throughout a mortgage application rather than assuming that the product selected at the beginning of the process will necessarily remain the most appropriate option by the time the mortgage offer is issued.
Key Takeaways
- The property had a Home Report valuation of £200,000.
- The mortgage valuation came back approximately £26,000 higher.
- The improved valuation moved the clients from a 95% LTV product to an 85% LTV product.
- Their monthly mortgage payment reduced by approximately £75.
- That equates to around £900 per year if the difference remained the same.
- The case shows how a change in property valuation can affect the mortgage products available.
In Summary
A change in property valuation doesn’t always create a mortgage problem. For these clients, the opposite happened.
After initially looking at a 95% LTV mortgage, the property’s higher valuation improved their loan-to-value position enough to access an 85% LTV mortgage product.
The result was a mortgage payment approximately £75 per month lower, giving them a saving of around £900 a year while also arranging suitable protection alongside the mortgage.
It’s a great example of how a change in property valuation during a purchase can have a meaningful impact on the mortgage products available and the borrower’s monthly payments.
Buying A Property And Want To Understand Your Mortgage Options?
Whether you’re buying with a small deposit, purchasing above a Home Report valuation or simply want to understand how your property’s valuation could affect your mortgage, Oportfolio Mortgages can help.
Our advisers can assess your deposit, mortgage amount, property valuation and loan-to-value against suitable lender criteria and available mortgage products. Speak to Oportfolio about your mortgage options.
