Another knock on effect caused by the rise in mortgage rates is a surge in down valuations. Recent research has found that around 46% of UK properties in the last few years have been down valued by mortgage lenders, and homes valued in the price bracket between £400,000 and £500,000 are most often affected.
A down valuation can happen when a home is being valued in the mortgage application process, and the bank or building society comes back and says it is not worth the price you have agreed to pay. This can cause a major headache whether you are selling a home, buying a home or remortgaging, as it can lead to chains collapsing and people being unable to buy or sell their home. In this article, we will go through what down valuation means, why it happens and what you can do if it happens to you.
How Are Properties Valued?
When you sell a home through an estate agent, they will calculate an asking price based on the selling prices of similar properties in the area, the size of the home, the location and the general condition of the house. When you buy a home, most people need the help of a mortgage to achieve their dreams, so a mortgage lender will survey the home and give its own estimate of what the property is worth. Mortgage surveyors base their house valuation on the sale of similar properties in the local area, economic issues and supply and demand mechanics.
What Does Down Valuation Mean?
A down valuation can happen when a surveyor, acting on behalf of a mortgage lender, evaluates a home and comes back and says it is not worth the price agreed by the parties involved. So, for example, if you've agreed to buy a home for £250,000 but the mortgage surveyor thinks the property is only worth £240,000, it means you now have a shortfall of £10,000. If a lender won't provide a mortgage to cover the full asking price, then the prospective buyer will not be able to purchase their new home unless they can increase their deposit or find the shortfall amount.
Why Are More Down Valuations Happening?
There are several reasons why a down valuation may happen:
The seller is aiming for a too high price for their home
The seller may have undertaken a scheme of renovations and overestimated how much value they have added to the property
The surveyor may have found issues with the home
Mortgage lenders are being more cautious with higher-priced homes
The surveyor may not know the area where the property is located, so they don't understand the local market
Rising interest rates across the mortgage market
What Can You Do If the Home You Want to Buy Is Down Valued?
If the mortgage lender comes back with a lower house valuation, there are three things you can do:
Go back to the seller and see if they will renegotiate or drop the asking price
Try and raise the extra money needed to raise your deposit to cover the shortfall
Pull out of the house purchase
If you really want to buy the property, you could try to get a loan to cover the extra amount or borrow money from family. You could also get the property valued by an independent surveyor or try to appeal the decision. Most lenders do have an appeals process, but they often do not advertise it widely. To appeal the decision, you will usually need to find three comparable pieces of evidence to show that like-for-like properties have sold in the last three months for the value you are looking for. This may involve ringing around estate agents as historical sales data online is usually older than three months.
You could also try going to a different lender, but this may not make any difference as they may use the same surveyor or they may have asked a local independent surveyor who knows the market in your area.
How Do Down Valuations Affect Sellers?
If you are the vendor of the property and you are told that your house has been down valued, you should be prepared to lower the asking price to keep your buyer and keep the property chain intact. If you really believe that your home is worth the asking price, you may have to accept that you will lose your buyer and that you will come up against this problem again and again. This is because if one mortgage provider has down valued your home, it is likely that others will do too and holding out for a cash buyer or someone with a higher deposit may take more time than you have.
How Do Down Valuations Affect Remortgages?
Down valuations can also affect remortgages because the valuation requirements are very similar to the house buying process. When applying for a remortgage, you will tell the mortgage provider what you think your house is worth and they will then do their own valuation based on sold house prices in the area. If they come out with a lower figure, this will reduce the amount they are prepared to lend you.
For example, if you think your home is worth £300,000 and your remaining mortgage amount is £255,000 it gives you equity in your home of £45,000, which is equivalent to a 21% deposit. If the surveyor says the property is only worth £290,000, this reduces your equity down to £35,000 (which is a 17% deposit), which will put you in a higher loan to value (LTV) bracket. This means that your interest rate will be higher, and you may have fewer lenders to choose from. To see how much you can borrow, tools such as https://www.onedome.com/services/mortgage-passport/can help.
Are There Ways to Avoid Down Valuations?
Try and do as much research as possible on sold house prices in the local area before putting in an offer on a property so you can avoid putting in an offer which is too high. Always remember that down valuation doesn't have to mean that you cannot buy your dream home, you may just have to be a little more creative to make the sale go through.
OneDome and CMME Mortgages are part of the same group, with OneDome serving as a referrer to CMME, who are authorised and regulated by the Financial Conduct Authority. Visit https://www.onedome.com/mortgages/mortgages-explained/ to learn more and take advantage of their expertise in navigating the mortgage landscape.
Your home may be repossessed if you do not keep up repayments on your mortgage.
OneDome is part of and refers enquiries to the CMME group. CMME is regulated and authorised by the Financial Conduct Authority. For more information please visit https://www.onedome.com/mortgages/mortgages-explained.
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