Buying or financing a property often relies on a surveyor’s valuation. If you’re taking out a mortgage then the lender will always require a formal valuation of the property – but what happens if the valuation is less than you were expecting?
Keep reading for everything you need to know about a mortgage down valuation.
What is a mortgage down valuation?
Members of the Royal Institution of Chartered Surveyors (RICS) are professionals, instructed by a lender to establish the market value of a property.
Generally, they are either:
- Establishing that the purchase price you have agreed for a property is reasonable.
- Establishing that the current market value of the property you are remortgaging is what you say it is.
Sometimes, a lender will report that the value of the property is less than you expected. This is called a mortgage lender ‘down valuation’.
Surveyors are not being deliberately difficult when they down value a property. They are obliged to provide a realistic market value for a property which is often based on:
- Comparable evidence of the sale price of similar properties locally.
- Knowledge of the demand and supply in the locality and the prevailing market conditions.
- The current condition of the property.
For example, your offer of £200,000 may have been agreed by the seller. However, having undertaken a valuation the surveyor believes that the property is worth £190,000. They have ‘down valued’ the property by £10,000.
Mortgage valuation down valuation – when does it apply/happen?
For chartered surveyors, an accurate valuation is a professional obligation.
Richard Sexton from e.surv chartered surveyors says: “The mortgage valuation is not an attempt to ‘down value’ a property from an authentic higher price. Surveyors have a duty of care to report accurately and independently.”
A down valuation occurs when a surveyor cannot find evidence to support the purchase price or estimated value of a property.
Peter Bolton King, residential director at the Royal Institution of Chartered Surveyors, says: “When prices fall, as they did during the financial crisis, lenders’ first tendency is to sue surveyors for overvaluing.
“As a result, surveyors have to be very certain they can evidence the value they have put on paper.”
What happens if the mortgage valuation is lower than your offer price?
If the mortgage valuation is lower than your offer price then it can affect your finance. This is because the amount you can borrow is usually based on a percentage of the property value.
If the property is deemed to be worth less by your lender’s surveyor, the lender may reduce the amount they will lend to you. If there is a down valuation, mortgage finance can be hard to agree at the level you want.
Here’s an example. You agree to a purchase price of £200,000 on the property you want to buy. You have a 20% deposit of £40,000 and you are applying for a mortgage of £160,000 (80% loan-to-value (LTV)), at a set rate of interest.
If your lender’s surveyor decides the property is worth only £180,000, the bank will advance only 80 per cent of the lower amount, or £144,000. This leaves you with a £16,000 shortfall.
If you decide to borrow the £160,000 anyway, this takes your ‘loan-to-value’ to 89 per cent. If your lender will still agree the mortgage you are likely to pay a higher interest rate, making the loan more expensive.
What can you do if the property is down valued?
If the property is down valued you have three main options:
1. Renegotiate
You can ask the seller to lower their price. Sometimes, a lower valuation can help you to get a better deal on the property.
Mortgage expert Ray Boulger says: “This is particularly true if a property has been on the market for some time or it has not attracted much interest.”
If your seller has already found another property, they may be more open to renegotiating to avoid delays.
2. Challenge the valuation
Not all lenders will accept appeals, and they are rarely successful, but some may let you appeal the decision. You will often have to show evidence of similar sale prices for comparable homes in the area.
Ask your lender how comprehensive the valuation was. If the surveyor did not view the inside of the property and you feel it adds significant value, or you think they missed something, you could ask for a more comprehensive valuation (such as a Homebuyers Report) or a re-evaluation.
3. Apply again
Valuation is not an exact science and some lenders differ in terms of exactly what figure they want from a valuation.
So, you could apply for a mortgage with another lender. While you will have to pay for another valuation, the new lender’s surveyor may value the property at a higher price.
How common is a down valuation?
Peter Bolton King from RICS says that the problem of mortgage down valuations is often more prevalent in a rising property market.
Surveyors base their decisions largely on so-called ‘comparable evidence’, such as recent sale prices in the same area for similar properties. “If property prices rise quickly, comparable evidence never catches up,” he says.
Which valuation is most valid?
If you’re taking out a mortgage then the lender’s surveyor will almost always have the final say on the valuation.
A good surveyor has access to more information than you or even your estate agent, and it’s their professional duty to make an informed valuation.
Remember also that if your lender down values a property you’ve put an offer on, they’re looking after you and trying to make sure you don’t pay over the odds.