Down valuation happens when a surveyor or mortgage lender values a property at less than the agreed purchase price.
If your property, or a property you’re buying, has been down valued, you will have a few different options. You can either challenge the valuation, renegotiate the purchase price or find a way to make up the difference between the valuation and the purchase price.
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Before you get a mortgage approved, your lender will need to value the property you want to buy. They will do this for two reasons. Firstly, they will want to ensure the property is worth the amount you say it is. Secondly, they will need to know the property value to work out your Loan to Value (LTV) ratio. The Loan to Value ratio will determine the interest rate they offer you.
Your mortgage lender will want to ensure your property is valued accurately. This will protect them from financial loss if you are unable to keep up with your mortgage payments. If they are forced to repossess the property, they want to ensure they don’t have to sell at a loss.
There are two ways for a mortgage lender to value your property: in-person inspection or desktop valuation. An in-person inspection will be carried out by a qualified surveyor. A desktop valuation is likely to use an Automated Valuation Model based on recent property market data.
Which option your mortgage lender chooses will likely be dictated by how confident they are in the data available. They may consider how many comparable sales there have been recently, how unusual your property is, and whether the lender has any concerns about the agreed sale price. It will also depend on whether you want to upgrade to a property survey. If you choose a full survey, a valuation for the mortgage company will likely be done at the same time.
If you are buying a property with cash, there will be no obligation to have a survey or valuation, but it is often still wise to do so. Property surveys can uncover a whole host of issues that may not be obvious during a normal property viewing, and a valuation will ensure your investment is a wise one.
According to research, there’s been an increase in surveyors down valuing property in recent years.
With continued uncertainty about inflation and interest rates, the property industry is cautious.
Until the economy stabilises, we can expect to see surveyor and lender caution around property value. JLM Mortgage Services suggests that 20% of properties are currently being down valued by lenders. This illustrates the level of caution currently being felt by lenders.
High inflation and interest rates mean many mortgage lenders are cautious about homeowner affordability and market stability. There are concerns that wider economic and political uncertainty could result in further corrections. Mortgage lenders are keen to protect themselves from financial loss in case we see a rise in repossessions.
| Example | |
|---|---|
| Agreed sale price | £300,000 |
| Cash you have available for deposit | £45,000 (15%) |
| Mortgage applied for | £255,000 at 85% LTV |
| Down valuation | £270,000 |
| Mortgage available with same product | (85% LTV) £229,500 |
| Deposit required to buy at agreed selling price | £70,500 |
| Shortfall | £25,500 |
Despite it being more common than ever, it can be difficult to find down valuation advice for home buyers. If you’re in the process of buying a property and have been told your mortgage company has down valued it, your first step should be to approach the seller. If your lender has down valued the property, it’s likely that any other potential buyers would have the same problem. This means it’s in their interest to renegotiate a lower sale price to reflect the down valuation.
If your seller is unwilling to renegotiate the sale price by an acceptable amount, you have a few other options:
Look at your finances and see whether you can still afford the property with lower borrowing ability. Using the example above, do you have access to additional funds that could make up the shortfall?
Discuss your options with your mortgage lender, is there an option to change product? Using the example above, would they offer you a 90% LTV product based on the new £270,000 down valuation? This would mean, with your £45,000 deposit, your shortfall would be reduced to £12,000 rather than £25,500. Alternatively, a 95% mortgage that would eliminate any shortfall. You will need to consider, however, that if your LTV rate is higher, your interest - and therefore your repayments - will be too.
It is possible that a different lender would have different thoughts on the value of the property, so it may be worth exploring. A mortgage broker is a good place to start looking into your down valuation mortgage options. They are likely to have an idea about which lenders may offer the greatest flexibility. Your seller will need to understand, however, that exploring alternative mortgage options will delay the sale. If the sale is held up too much, you and the seller risk the whole property chain falling through.
If you’re experienced mortgage down valuation and want to negotiate with the seller, these tips could help.
If your property has been down valued by your buyer’s mortgage lender, your estate agent should be your first point of contact. As the people who set the asking price for your property, it’s important to consider why the lender has valued the property lower than the estate agent’s valuation.
If the lender has identified something within the property that down values it, eg. an issue with the property that requires fixing, you may be able to get the work done and then have the property revalued. Alternatively, if this will slow the sale down too much, you’ll need to consider dropping the agreed sale price to the new down valuation figure.
It’s not just property sales where down valuation can be an issue.
If you experience down valuation when remortgaging, it’s likely to impact both the amount you can borrow and your loan-to-value ratio (LTV). A higher LTV means higher interest rates and therefore higher repayments.
If you’re hoping to borrow additional funds for a particular purpose, you have three options:
If you want to avoid having a down valued property, it’s important that your home is priced realistically. Estate agents have been known to overvalue properties in a bid to secure the listing, so make sure you get at least three different valuations and ask for comparable sales in the area that justify the valuation they give. You can also do your own independent research using sold price tools available on some of the major property portals such as Rightmove and Zoopla.
If you want to avoid down valuation as a buyer, it’s important not to get caught up in any bidding wars with other buyers. Bidding wars often push property prices higher than the property’s original valuation. Do your own research on what you think the property is worth before making an offer. Then ensure you don’t be pushed higher than that figure.
A down valuation can come as a big blow – whether you’re buying, selling or remortgaging. It’s important to remember that there is usually a way forward if you take time to explore all the options available to you.
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