As we are into lockdown #54, it is timely to look at the role of the valuation, in particular online mortgage valuations, when looking to obtain the best mortgage rate possible.
In a normal situation, you have a mortgage valuer happily going about their business, going from property to property and reporting back to a lender.
During a pandemic that could be referred to as a “super-spreader”, so a lot more care needs to be taken and adaptations made to make it safe for everyone.
Using online mortgage valuations, which are often referred to as ‘Desktop’ or ‘Automated Valuation Models’ (or AVMs for short), the difference of which we’ll explore below, is a very logical move. As you can’t get a mortgage approved without a valuation you can’t underplay how crucial this step of the process is.
We wrote a more generalised blog on the role of valuations in obtaining a mortgage last year, which you can read here, but this is very focused on some of the issues we may experience during lockdown and how to navigate them:
Why are mortgage valuations so important?
Put bluntly, if you stop paying your mortgage, the value and type of property the mortgage is secured against plays a crucial role, as the lender may have to repossess and then sell the property at some stage.
This explains why lenders are not keen on lending a large loan as a % of the property – as if you are putting down just a 5% deposit and you default early on, it only takes a small dip in house prices, coupled with the accumulating interest, and the lender faces making a loss on the loan. This also explains why lenders sometimes shy away from very high value and unusual properties as they can take a long time to sell and are very market dependant.
We once secured a mortgage for a beautiful timber framed property, on a little island in the River Thames just on the Surrey/London border. The buyer was very surprised how hard it was to secure a mortgage, but once we explained that it was – an unusual construction (Timber Framed), a flood risk and with relatively high gearing (85%) – it was then clear that lenders were wary due to the time it may take to find a new buyer, plus the limited amount of lenders that will offer a loan on such a property. We of course found a solution but it wasn’t with a high street bank.
Granted that is a very extreme example, but it goes to show that even beyond your own personal capacity to pay for a mortgage, there are other factors which require consideration. Lenders love ‘standard’ properties, so will always lap up brick built, terraced houses in densely populated or high demand areas. The further away you move from that benchmark, the harder it is to find a lender. Particular high risk areas are:
- High rise flats (generally 6 stories plus)
- Ex-local authority properties
- Non-Standard construction types (wood, concrete, pre-fab etc)
- Office conversions
- Mixed use residential and commercial
- Multiple units on one title
So while Grand Designs may have a field day, your average High Street lender will struggle to see the unique value of such a property.
What steps are lenders/surveyors taking to conduct safe valuations during Covid?
The property does need to be vacant, or vacated. On the assumption that can be done, then surveyors will instruct the owners to leave all doors and windows open for the duration of the valuation so they do not have to touch anything. Often video or email instructions are sent ahead of time for guidance. If this isn’t possible, then the survey will go into a queue for when lockdown ends, or where possible, an online valuation will be conducted. Lenders will also push for online valuations if anyone who lives in the property is shielding and/or self-isolating.
Some lenders have taken the option to go for an online valuation where possible in the first instance, and only if that is unsuccessful, then reverting back to a traditional physical valuation.
How do online mortgage valuations work?
All lenders/surveyors slightly differ but the principal is the same – various data sources are obtained, typically things like Land Registry Data, recently sold prices, their own experience of property in the local area, the large house price indices (such as Halifax and Nationwide) and sometimes the opinion of local survey who will know the property/area in question.
Once this research is concluded, the bank gets access to a value and confidence rating, so in a simple example – If the value comes back as expected, and the rating is 10/10, that would indicate that the value agreed for the sale, or estimated value for a remortgage, is correct and the lender should have enough confidence to lend the amount requested.
If the rating is value/rating is lower, say in the 7-3 bracket, the % of loan against the property then becomes very relevant, which is expressed as LTV (Loan to Value). If it is a low LTV, say sub 60%, most lenders will proceed in any case, as while they can’t be completely sure the property is the value they believe, it is certainly sufficient for the loan applied for.
If the LTV is higher, typically 75% +, the lender may – offer a lower loan, or request a physical valuation. If the value or confidence rating is extremely low, a lender may insist on a physical valuation before proceeding any further. This will typically be for unusual properties as outlined above, flats, or high value properties (typically £1m+).
Exactly the same principals are applied when looking at agreeing a Buy To Let Mortgage, but there will be an additional figure of the expected rental income. If you are remortgaging a Buy To Let, some lenders will accept bank statements/tenancy agreements as evidence of rental income (but a word of caution, even with such evidence the rental income can still be down valued if the surveyor feels the market has fallen since you agreed your tenancy…)
What are the limitations to online mortgage valuations?
As touched on above, the main limitations are:
- Value – most lenders top out around £1m, but some will go as high as £3m.
- Property Type – a few lenders exclude flats entirely, and most will exclude any nonstandard construction type.
- New Build Properties.
- Data Sample – low transaction areas it may be too hard to gauge the current value due to lack of recent sales. These will typically be rural/sparsely populated areas.
Online mortgage valuations have been widely used for many years, but until lockdown 1.0 they were typically just used for low LTV remortgage work. Lenders like Halifax and Barclays had moved into the purchase area pre-lockdown, but again on lowly geared properties. This is an area that Covid has forcibly moved the market forward about 10 years in a matter of weeks, as especially in the first lockdown, so one of the few upsides to this whole experience.
Should you wish to discuss any of the issues raised above about online mortgage valuations in more detail, or require a conversation about your mortgage needs more broadly, we would be delighted to help. Please feel free to contact us or speak directly to a member of the team, details of which you can find here