Last year, an estimated 1000 properties were down valued. It can cause a bump in the road when buying, but it’s not necessarily a deal breaker. This guide explains what a down valuation is, how to deal with it if it occurs, and how best to try and avoid it.
What is a down valuation?
A down valuation, in mortgage terms, refers to a situation where the mortgage lender assesses the value of the property to be lower than the agreed-upon purchase price. This can have varying impacts on your mortgage application, depending on the specific criteria of the lender and the amount of deposit you have available.
What impact can a down valuation have on your purchase?
If the property is downvalued, it can affect your mortgage application in several ways:
- Loan-to-Value (LTV) ratio: Lenders typically calculate the mortgage amount based on a percentage of the property’s value. If the down valuation results in a higher LTV ratio, it may affect your ability to secure a mortgage or result in higher borrowing costs, such as higher interest rates or mortgage insurance requirements.
- Deposit requirements: If the down valuation reduces the property’s value, it may impact the amount of deposit you need to provide. A lower valuation may mean that your deposit is no longer sufficient to meet the lender’s requirements, and you may need to provide additional funds to make up the difference.
- Mortgage approval: Lenders may reevaluate your mortgage application based on the down valuation, and it could impact the overall approval process. The lender may require additional documentation or reassess your affordability based on the revised valuation.
What to do if you have a down valuation
If you encounter a down valuation on your mortgage. Here’s a summary of the possible actions:
- Appeal the decision: You can appeal the down valuation decision with the surveyor by providing comparable evidence that supports a higher valuation. While appeals are not routinely overturned, if you have reasonable grounds and evidence, there is no harm in trying. There is usually no cost to appeal.
- Apply with another mortgage lender: You can consider applying with a different mortgage lender and hope for a different outcome. It’s important to check which surveyors the new lender uses to avoid potential bias. If the new lender’s valuation comes out higher, it may impact your loan-to-value (LTV) ratio and mortgage product options.
- Proceed with lower valuation: If the lower valuation still fits within the product range of your desired mortgage, you may choose to proceed with the lower valuation and select a new mortgage product based on the revised LTV. This could involve different interest rates or terms.
- Renegotiate with the seller: You may try renegotiating the purchase price with the seller based on the lower valuation. This could involve asking the seller to reduce the price or meet you halfway to bridge the gap between the original purchase price and the down valuation.
- Combination of options: You could also consider a combination of the above options, such as appealing the valuation while simultaneously exploring alternative mortgage lenders or renegotiating with the seller.
It’s important to carefully evaluate the pros and cons of each option and consult with relevant professionals, such as estate agents, mortgage brokers, and legal advisors, to make informed decisions based on your specific situation.
Examples of dealing with a mortgage down valuation
Example based on initial £300,000 purchase price down valued by the mortgage lender to £280,000 purchase with initial £30,000 deposit.
- No renegotiation with higher interest rate LTV payable: In this scenario, if the property is down valued to £285,000 and the mortgage amount is £270,000, the loan-to-value (LTV) ratio would be calculated based on the lower valuation. With a property value of £285,000 and a mortgage amount of £270,000, the LTV would be approximately 94.7% (£270,000 divided by £285,000 multiplied by 100). If the lender’s product range for mortgages with high LTV ratios is limited or comes with higher interest rates, it may result in the borrower being offered a higher interest rate compared to what they were initially expecting. This would result in higher monthly mortgage payments over the term of the mortgage, potentially impacting the borrower’s affordability and budget.
- Adding additional funds to meet the LTV: In this scenario, if the property is down valued to £285,000 and the borrower wants to maintain the original LTV ratio of 90% with a mortgage amount of £270,000, they would need to increase their deposit to cover the shortfall. Based on the down valued property price of £285,000, the borrower would need a deposit of £28,500 (10% of £285,000) to maintain a 90% LTV ratio. Since the original deposit was £30,000, the borrower would need to add an additional £1,500 to their deposit to meet the original LTV ratio of 90%.
- Reduction in price: In this scenario, if the property is down valued to £285,000 and the borrower and seller agree to a reduction in the purchase price, it could result in a lower mortgage amount and potentially impact the LTV ratio. For example, if the purchase price is reduced to £280,000, the new mortgage amount at 90% LTV would be £252,000 (90% of £280,000), assuming the borrower maintains their original deposit of £30,000. This would result in a lower LTV ratio of approximately 90% (£252,000 divided by £280,000 multiplied by 100).
How to avoid a down valuation
Whilst it’s impossible to guarantee avoiding a mortgage down valuation.
Here are some tips on how to potentially avoid a mortgage down valuation:
- Do thorough research: Utilise property portals like Rightmove and Zoopla to research and compare sold property prices in the area where you’re considering buying. This can give you an idea of the market value of similar properties, which can help you make an informed decision on an appropriate purchase price.
- View multiple properties: View a variety of properties within your price bracket to get a sense of the market and ensure you have a good understanding of property values in the area. This can help you make a more accurate offer that is in line with market value, reducing the risk of a down valuation.
- Avoid bidding wars: Be cautious of getting into bidding wars that may drive up the purchase price beyond the market value. Overpaying for a property can increase the likelihood of a down valuation, as the lender’s valuation may not align with the inflated purchase price.
- Be mindful of the property’s condition: Consider the condition of the property when making an offer. Properties in need of extensive repairs or renovations may be more likely to receive a lower valuation, so it’s important to factor in the property’s condition when determining your offer price.
- Timing of property viewings: Try to view properties before they officially come to the market. This can give you an opportunity to negotiate directly with the seller before the property is listed, potentially avoiding a bidding war and reducing the risk of overpaying.
- Work with a knowledgeable estate agent: Partner with a reputable real estate agent who has local market knowledge and experience. They can provide guidance on fair market values, help you negotiate offers, and provide insights on potential down valuation risks.
- Save for a larger deposit: Having a larger deposit can reduce the loan-to-value (LTV) ratio, which may lower the risk of a down valuation. Saving for a higher deposit can give you more equity in the property and increase your chances of a favourable valuation.
It’s important to remember that a mortgage down valuation can still occur despite taking precautionary measures. Being prepared for such situations and having alternative plans in place, such as appealing the valuation or renegotiating with the seller, can help you navigate any potential challenges.
Types of mortgage valuation
There are several types of mortgage valuations that lenders may use to assess the value of a property.
These can include:
- Desktop valuation: A desktop valuation is conducted remotely by the valuer, using data and information available online, without physically visiting the property. It is a less detailed and less accurate valuation compared to other types of valuations, and is usually used for properties with lower loan-to-value (LTV) ratios or when the lender wants a quick assessment of the property’s value.
- Drive-by valuation: A drive-by valuation involves a valuer conducting a limited physical inspection of the property from the exterior, typically from the curb or from the street. The valuer does not go inside the property and relies on external observations and data sources to assess the value. This type of valuation is generally used for properties with moderate loan-to-value ratios or when the lender requires a slightly more detailed assessment than a desktop valuation.
- Physical valuation: A physical valuation is a more comprehensive valuation that involves a valuer conducting an in-person inspection of the property, both inside and outside. The valuer assesses the condition, size, and features of the property, and may also consider comparable sales data and other factors. Physical valuations are typically used for properties with higher loan-to-value ratios or when a more accurate and detailed assessment of the property’s value is required.
- Level 2 survey: A Level 2 survey is a more detailed survey of the property’s condition and construction, typically conducted by a qualified surveyor. It provides a more comprehensive assessment of the property’s condition, including any potential issues or defects. While a Level 2 survey is not a valuation per se, it can provide valuable information to the lender and the borrower to make informed decisions about the property’s value.
It’s important to note that different lenders may use different types of valuations, and the specific type of valuation used can depend on factors such as the loan amount, loan-to-value ratio, property type, and lender’s requirements.
Mortgage down valuations on remortgages
Down valuations are more commonly seen in remortgage situations compared to purchases. Lenders typically have stricter criteria for remortgages as they assess the property’s value for refinancing purposes, and a down valuation can result in a lower loan amount or higher LTV ratio, potentially impacting the remortgaging options available to borrowers.
To avoid disappointment, it’s wise to be conservative with estimations of the value of your home when applying for a remortgage. It’s essential to research and understand the current market conditions and comparable property prices in your area to ensure that your estimations are realistic.
How can Strive Mortgages help
Having a mortgage broker with experience in dealing with mortgage down valuations can provide valuable guidance and support. They can help borrowers understand the available options and navigate the process effectively. If you’ve had a down valuation or have any questions about the impact of down valuations, we’re more than happy to help.