It’s worth as much as someone is willing to pay… or is it? This week we have had three separate property purchase cases where properties have been significantly down valued by the lender’s valuers at mortgage application stage. What does a property down valuation actually mean? Why does it happen? And what could happen if you are trying to get a mortgage?
What Is a Property Down Valuation?
A property valuation is something that needs to take place for most mortgage lenders to agree to the mortgage requested. Essentially, the mortgage lender wants to make sure that there are no issues with the property that they are lending money on, and that it is worth what you say it is worth. Just in case they need to repossess the property in the future and sell it to recoup their money. A lender will appoint a valuer to act on their behalf and they will either conduct an in-person valuation where the valuer will physically go out to the property and conduct a valuation. Or they will conduct a desktop valuation which is done remotely.
As long as the valuer values the property at the correct value, then your mortgage application should go through ok. However, there are instances where property down valuations happen. This is when a valuer values a property at less than you are buying it for or less than the person selling it is trying to sell it for. This can happen for a number of reasons:
- The person is asking too much for the property. An unrealistic valuation. Sometimes this happens because people want to make as much money as possible by selling their property, so sometimes they will ask for an over inflated amount for their house. This can also be down to the sales agent too who may over inflate the price because they don’t know the are well enough.
- There are some serious issues with the property structurally. A valuer will look at lots of elements when valuing a property. If they discover something wrong that can harm the future saleability of the property, then they will lower the valuation that they give. This can be things like unstable foundations, wood rot, crumbling walls, faulty plumbing or electricity, Japanese Knotweed infestation or other pest infestations.
- Undesirable location or location that the property is built on. This is quite self explanatory. If a property is in an area that is likely to flood or have subsidence, if it is in a flight path or near a busy and dangerous road, if it is above a smelly restaurant or a bar/pub. All of these things can impact the future saleability and value of the property.
What Can Happen If a Property Is Down Valued?
In most cases, a property down valuation is not something that is desirable and can cause some property purchases to fall through or be delayed. For some cases, this can work to a buyers advantage as they can use this to renegotiate a lower purchase price. It is sometimes possible to challenge this, but it incurs extra costs to have a re-valuation, and there isn’t often much change in the result.
But where property sellers are not willing to budge on the asking price, it can be tough for buyers, as the impact of a down valuation to a mortgage application can result in:
- Not the full loan amount required being offered, so the client having to increase their deposit. For example a person could be buying a home for £700,000 with a 75% mortgage of £525,000. If the property is down valued by £50,000 and the seller isn’t willing to take £650,000 for it and the loan amount is reduced, the buyer will need to put down a further £50,000.
- A higher loan to value ratio, resulting in a higher rate offered by the lender, and higher monthly payments.
- Buyers potentially not able to afford that property and needing to find another. This is the worst case scenario if you find your dream home but are unable to continue with the purchase due to the property down valuing and not being able to get a mortgage on it.
Real Down Valuation Stories
In the past, we have had a number of clients who have unfortunately had their properties down valued. Even for remortgages as well as purchases. One of our clients in the past bought their property for £320,000 two years ago and since then they have have carried out a lot of home improvement work to the property. Including a new kitchen and redecorating the entire home. After the upgrades to the property, they believed it was worth around £380,000 based on local sales of similar homes.
On this basis their LTV (loan to value) for the remortgage would be 74%, the rate applied for was 4.79%. When the lender’s valuer valued the property, they down valued the home to £345,000 despite all the work that had been done. This meant that the loan to value had now risen to 82%, which meant they didn’t qualify for the rates below 75% LTV or 80% LTV. Rates had also generally risen by the time the result of the valuation came back. The final rate offered by the same lender was eventually 5.39% due to the down valuation pushing the LTV up.
Speak To a Mortgage Advisor
Although unlikely to happen in most mortgage applications, down valuations do happen and unfortunately lenders and valuers are being much more cautious nowadays. If you are arranging your mortgage through an experienced and qualified mortgage advisor, this can really help you if a property down valuation happens. As we have already mentioned, if a property is significantly down valued unfairly, there can be the option to appeal the valuation and your mortgage advisor will be able to weigh up the pros and cons of doing this, to see whether it makes sense to appeal.
If a property is slightly down valued, then your mortgage advisor can help you to negotiate with selling agents and sellers to purchase the property for a lower price. If this is not possible, then your advisor can help you to get as much mortgage as possible still and get the best available rate and product for the new circumstances. And finally, if a property is down valued and you are unable to get a mortgage on the property anymore, your mortgage advisor will be able to help you to find another property and will be there again every step of the way to hopefully make the new purchase a success.
Looking to buy a new property or remortgage one that you already own? Speak to our mortgage team today for a free initial mortgage consultation. We are here to help.