Quite a timely issue to look at is that of Mortgage Valuations and their role in the overall mortgage process. This is a very large and complex in its own right, so for simplicity sake, we are just going to look at a few key themes and issues.
it is also important to understand that we are looking at mortgage valuations from a mortgage broker’s perspective and the role of valuations specific to mortgages. For a more rounded view, we can refer to you one of our recommended surveyors who can get into the detail of the types of survey and broader implications of their work.
Why are mortgage valuations required?
At the most basic level, this is to determine the mortgage lender’s risk. In that the higher the % of the property you are borrowing, the greater the chance there is of a lender losing money if you default on your loan. There is a magic number in mortgages which is having a 25% deposit or equity in the property, as if you have 25% or more in the property, the lenders won’t lose out. Why? That is because house prices have never gone down more than 25% in any once cycle.
This is then reflected in the mortgage pricing for 2 reasons –
1) if you borrow a smaller % of the property, you are less risky and therefore a better bet which equals a lower rate on offer, &
2) lenders don’t ned to hold as much money on deposit if the loan goes bad. These are called Basel III rules. Of course the opposite is true, so less deposit/equity = a higher rate. Also, that is why in times of uncertainty lenders pull their higher loan to value products first.
From your perspective, you want to make sure the property you are buying, or own, is worth what it should be. Survey’s should also point out any major issues like damp, structural issues or potential risks. Surveyors are often referred to as the lenders eyes in the process which is a good way of thinking about things.
What happens if my property is down valued?
If you are buying, this is great news! It means an independent expert as deemed the property not worth what the seller and/or agent are asking, so this opens to the door to renegotiate the price. A word of caution though, if the price was agreed, any human response is to not back down from that. If it were you, you’d likely not be too happy to be told your property is worth less than you though. If there is a material reason like a defect in the property, that can make the conversation easier, if the market has moved, maybe less so.
Also do bear in mind, surveyors are people and people do make mistakes. If it is agreed by all parties, sometimes getting a second survey is a sensible next step. If the figure comes back the same, that adds weight to reduce the price. If the second survey comes in as expected, a more complex conversation will ensure. At the end of the day, there are no rules on this so finding a common ground will be key to moving things forward. In days gone by mortgage brokers could contest the survey results by getting 3 comparable sales, typically, within a half mile radius, sold in the last 6 months. To set expectations, I can count on one hand how many times I have seen a surveyor change their mind in the last 10 years or so. Reason being, is that they will often do this process themselves to justify their valuation, so even if you can find contrary data to ‘prove them wrong’, they are likely to dig their heels in regardless. Much like going to a Doctor for a second opinion, the second party is often reluctant to undermine the first opinion out of professional courtesy.
If you are remortgaging, that can be more problematic. Sometimes it is immaterial as it doesn’t affect the product or loan on offer. However, sometimes if the property comes back lower than expected the rate or loan you applied for many longer work which could result in having to pay a higher rate or the loan being reduced. If this happens, any good mortgage adviser will talk you through the next steps (see above!)
What type of survey can I get?
- There are 3 types of survey you can instruct:
- Basic Mortgage Valuation
- Does what it says on the tin. A simple report to ascertain the value of the property and will highlight any major issues for further inspection. Most lenders pay for these when buying or remortgaging, but not always.
- Homebuyers report
- A more detailed report, which looks at the internal state of the property and can highlight potential issues you may want to look at
- Full Structural Survey
- As the name suggests, does all the above + looking at the roof and structure of the property. If you are not responsible for the structure of the property, e.g. buying a leasehold flat, this isn’t required as you will pay Ground Rent to a Freehold who is liable for this. If you are buying a property with a large renovation project in mind, this can very useful indeed in highlighting things you may need to know.
- Basic Mortgage Valuation
- We often recommend that you conduct a Basic survey in the first instance unless you have any specific concerns/plans for the property. If it comes back as expected, you are generally good to go. If issues/values are queried, that may be a good trigger to get a more detailed report.
Are surveyors required to visit the property?
For the basic valuation, no, but they are for the other types of survey. This is particularly relevant as we flick in and out of lockdown. During lockdown 1, many lenders pushed forward with AVM’s (automated Valuation models) and Desktop Valuations. Each mortgage lender slightly varies on how these work as some purely rely on data from various House Price Indices and past sale prices from the Land Registry, others use this as a guide and a qualified surveyor will also add their opinion based on their knowledge of the area.
These work well on houses and when a large deposit is involved in the transaction/house purchase (see first point for rationale on this). When flats are involved or areas with large variances in housing stock (for example, I lived in Battersea for years, one side of the street is a housing estate, the other a row of £1m+ houses, so that can be very difficult to model), it can be harder to use online systems. So too if a lot of work has been done to a property as if the property has doubled in value in 5 years due to the work done, that won’t be captured on any data point elsewhere. In these instances, a ‘physical’ valuation is often required, in which case, if vacant access to the property can’t be obtained, it may be a case of waiting until the current restrictions are lifted.
If you would like to have a more detailed discussion on mortgage valuations, please feel free to contact one of our advisers who will be more than happy to talk you through this in more detail and answer any specific questions you may have on your situation, or any mortgage need more generally.