What is a down valuation?
Down valuation – A valuation given to a property that is less than the agreed sale price.
In this guide
- What is a down valuation?
- Down valuations 2023 – How common is it?
- Why are properties being down valued?
- Down valuation advice for buyers – what to do if your mortgage company down values the house you’re buying
- Tips for negotiating after down valuation
- Down valuation – what to do if your buyer’s mortgage gets refused
- Property been down valued when trying to remortgage
- How to avoid down valuation
What is a down valuation?
Before you get a mortgage approved, your lender will need to 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, which 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 in the event that you are unable to keep up with your mortgage payments and they are forced to repossess the property.
There are two ways for a mortgage lender to value your property: an in-person inspection by a qualified surveyor or a desktop valuation using an Automated Valuation Model. The option your mortgage lender chooses will likely be dictated by how many comparable recent sales there have been, 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, in which case the surveyor will likely do a valuation for the mortgage company whilst carrying out your survey.
If you are buying a property with cash, and therefore do not require a mortgage, it is still wise to get a property survey and valuation to ensure your purchase is a wise one.
Down valuation 2023 – how common is it?
According to research, there’s been an increase in surveyors down valuing property in recent years. In fact, down valuations have doubled since the Covid-19 pandemic, with 12.8 per cent of property purchases being down valued in April 2022.
Now that property prices have begun to fall, will we see more or less down valuation?
Now that the long-awaiting price correction has begun, you may think that down valuation may happen less frequently. We initially saw an increase in down valuations because lenders were nervous whilst waiting for the over-inflated, post-Covid market bubble to burst. However, due to residual demand, the price correction we’re seeing is more gradual and likely to continue over a longer period of time. Whilst a more gentle correction is better for the property market, it does make it challenging for lenders to predict where prices may end up, and therefore their caution is likely to continue for some time.
Why are properties being down valued?
The property market has been very heated over the last couple of years and is currently cooling down. With rising interest rates and inflation, many mortgage lenders are growing increasingly cautious about homeowners’ ability to afford more expensive mortgage repayments alongside other rising costs. There are industry-wide predictions that property prices will continue to fall over the next few months, and mortgage lenders are keen to protect themselves from financial loss if we see the same level of repossessions we saw in the 2008 financial crisis.
It seems they are wise to do so, as recent financial data suggests that repossessions are already on the rise. According to UK Finance, 630 properties were repossessed between April and July last year; up from 580 properties in the first three months of the year, and 390 repossessions in the final three months of 2021.
Down valuation advice for buyers – what to do if your mortgage company down values the house you’re buying
Example of down valuation:
|Agreed sale price||£300,000|
|Cash you have available for deposit||£45,000 (15%)|
|Mortgage applied for||£255,000 at 85% LTV|
|Mortgage available with same product||(85% LTV) £229,500|
|Deposit required to buy at agreed selling price||£70,500|
|Shortfall – £25,500||£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, so it’s in their interest to renegotiate a lower sale price to reflect the down valuation.
If, however, they are not willing to renegotiate the sale price, or are not willing to reduce it sufficiently, you do 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 be willing to offer you a 90% LTV product based on the new £270,000 down valuation, which would mean, with your £45,000 deposit, your shortfall would be reduced to £12,000 rather than £25,500, or even a 95% mortgage that would eliminate any shortfall. You will need to consider, however, that the higher your LTV rate, the higher your interest (and therefore your repayments) will be.
- Approach a different lender – 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, as 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 is likely to cause significant delay to the sale. If the sale is held up too much, you and the seller risk the whole property chain falling through.
Tips for negotiating after down valuation
If you’re experienced mortgage down valuation and want to negotiate with the seller, these tips could help.
- Approach the negotiation with a desire to reach a mutually agreeable compromise. Both you and your seller are ultimately working to reach a successful sale. Explain the situation and say you’re still keen to move forward if a solution can be found, rather than entering the exchange demanding they drop the price to the new down valuation figure.
- Use the estate agent to assist in the negotiations. Their job is to deliver a successful property sale, so explain the situation and be clear on what you would need to enable the sale to proceed – the difficult conversations are theirs to have with the seller.
- Ensure the seller is aware that if your mortgage lender has down valued their property, it is likely that other lenders and surveyors are likely to do the same. If they are unable to reach a proceedable compromise with you, they are likely to come up against the challenges with any other buyers.
Down valuation – what to do if your buyer’s mortgage gets refused
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 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.
Property been down valued when trying to remortgage
It’s not just property sales where down valuation can be an issue. According to figures, 15.4 per cent of remortgages are down valued.
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:
- Talk through your options with your current lender. You could try to challenge the valuation or explore higher Loan to Value borrowing.
- Explore remortgaging with a different lender. A mortgage broker will be able to help you look at the different options available to you.
- If you’re not able to raise enough funds through additional borrowing on your remortgage, you could explore making up any shortfall with a bank loan.
How to avoid down valuation
If you want to avoid having a down valued property, it’s important that your home is priced realistically at the point of marketing. 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, as these 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, and don’t be pushed higher than that figure.
A down valuation can come as a big blow – whether you’re buying, selling or remortgaging – but it’s important to remember that there is usually a way forward if you just take time to explore the options available to you.
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