Imagine you’ve got a Decision in Principle (DIP) from a mortgage adviser, you’ve researched streets and neighbourhoods, and after countless viewings, you’ve finally found a property that feels like home. You’re applying for a mortgage and are looking ahead to completing the mortgage application …
This could be you already, or it might be just around the corner. Either way, it's vitally important that you consider the value of the property and the mortgage valuation process. Here, we explain why.
The Topics Covered in This Article are Listed Below:
What Is a Mortgage Valuation?
As part of the mortgage application process, a mortgage lender conducts a mortgage valuation to determine whether the offer you’ve made on the property is in line with its market value as assessed by a professional surveyor. This also applies in the case of remortgaging, again to check that the value stated in the application matches market conditions.
Mortgage valuations are carried out on behalf of the lender as part of a risk assessment process. They shouldn’t be confused with house surveys, which are for the benefit of the buyer. A mortgage valuation is carried out to assess whether the property can stand as valid collateral for the loan you intend to take.
Mortgage valuations are of benefit to the buyer too, as they’ll provide feedback on whether your offer is too high or too low. That said, they can complicate or even scupper the application process, as we explain below.
Who Does a Mortgage Valuation and How?
Your mortgage lender will arrange the mortgage valuation. Valuations are carried out by qualified surveyors accredited with the Royal Institute of Chartered Surveyors (RICS). These days, the survey may not involve a property visit and should take only 1 to 2 weeks to be completed. Only once the lender has received the mortgage valuation report can they decide on the size of the loan they're prepared to offer.
Valuations on buy-to-let properties will also factor in an estimate of the rental value of the property based on comparable rents in the neighbourhood.
In the past, a surveyor would always visit the property to prepare their report. However, it's increasingly common to value properties based on sales data that’s available online. Whether or not your survey involves a physical visit depends on the mortgage lender. For instance, they may opt for a physical survey because they haven’t covered the area before, or if there’s scant property information available online.
The lender may also opt for a site visit if the property is made of a non-standard building material like concrete, or if there’s any other factor that may add to the risk of lending.
Whether the survey involves a visit or not, the lender bases their decision regarding the size of the mortgage they're prepared to offer on the professional advice of the surveyor.
How Much Do Mortgage Valuations Cost?
Many high street lenders offer free valuations to attract new customers and use an automated valuation model that won’t require a site visit. However, if your lender is going to charge, you should expect to pay between £150 and £1,500. The mortgage valuation fee is typically based on the value of the property.
Valuations Vs. Surveys
Mortgage valuations shouldn’t be confused with a property survey. As a valuation is commissioned by the lender, you may never see the surveyor's report or a summary of the findings. In any case, it won't provide information on the condition of the property and won't provide guidance on whether you should go through with the purchase.
To know whether there may be defects with the property, the buyer should commission either a homebuyer’s report or a full structural survey. Structural surveys do not typically involve a valuation, but some homebuyer reports do. If you're opting for a homebuyer report, you should check with your mortgage adviser whether it’s acceptable to the lender, otherwise you might end up paying twice.
There are four main types of survey, ranking from lowest cost to most expensive – and thorough – below:
- Snagging Survey - this is the most basic survey which covers non-structural issues related to poor quality workmanship such as paintwork or plumbing. This survey typically costs £300 – £600 and is ideal to check any final snagging issues before moving into a new build
- Condition Report - this is a good choice if you're moving into a recently built property. The report is also known as the RICS Home Survey – Level 1. This will assess the visual condition of the building and any outbuildings, as well as services such as gas, electricity, and water supply. The report will also check whether planning permission was granted for any previous renovations
- Homebuyer Report - otherwise known as the RICS Home Survey – Level 2, this is a mid-level option when buying a conventional property in reasonable condition. Beyond the RICS Home Survey – Level 1, this report will include issues that may affect the value of the property, an assessment of energy efficiency, advice on possible repairs as well as information following an inspection of roof spaces and cellars. Level 2 surveys are offered with or without a valuation
- Structural Survey - this is also known as the RICS Home Survey – Level 3. The starting price is around £750 and for this, you’ll get a comprehensive check of all aspects of the building. It's ideal if you're buying an atypical property or an old or listed building
What Happens after a Mortgage Valuation?
Once the surveyor has completed their assessment, they'll provide a short report to your mortgage lender. If their findings are favourable and the report agrees that the offer price – or remortgage value – is in line with the market, then it's likely your application will be accepted.
However, the surveyor’s report could also conclude that the offer price is higher than its actual market value. This is known as a down valuation. The lender may therefore reduce the loan amount they're prepared to offer you.
What is a Down Valuation and Why Does it Matter?
When the asking price of a property is out of step with market trends, there’s a risk of a gap between the value proposed by estate agents and the professional surveyor’s recommended price. House prices may be falling at a faster rate in a specific area, or sales volumes may have slackened due to a change in government policy.
Whatever the cause, a down valuation can have serious consequences for the buyer or person seeking to remortgage. For example, suppose you’re looking to buy a £350,000 property with a 90% loan-to-value mortgage and have a £35,000 deposit. This means you’re looking to borrow £315,000.
If the surveyor suggests the house is in fact worth only £300,000,you'll only be offered a £270,000 mortgage. With the deposit, you’ll have £305,000, leaving a shortfall of £45,000. If the seller isn’t willing to negotiate downwards, the deal may not go through, and you’ll have to begin your property search from scratch.
What Do I Do if My Property Has Been Down Valued?
If you’ve received a down valuation from the lender, your first option is to negotiate with the seller. You may stand a chance here, as the seller may realise that any other buyer is likely to receive the same valuation from their lender. The seller may also be keen for the sale to move forwards even if at a reduced price.
If the seller refuses to accept a lower offer, you might be able to challenge the valuation if you feel you have a strong case. Challenges to down valuations are, however, a matter for the lender, and they may not change their view.
This leaves only two options. You could accept the reduced mortgage offer and attempt to bridge the shortfall through other methods. Many people may simply not be able to go this route, which means they may have to find a different lender who uses another surveyor. Of course, there's no guarantee the second mortgage valuation will be any different.
How Do I Avoid a Down Valuation?
Down valuations can be highly frustrating. To avoid them, if you’re either selling or buying, we recommend:
- Research what properties in the area have sold for in the past few months to get a sense of a realistic price
- If you're selling your property, ask three local estate agents who have been selling properties like yours to value your home and go with the middle valuation
- If you’re selling your home, check the property price your current mortgage lender has on their file for your home
- If you're looking to put in an offer, don’t hesitate to offer under the asking price if your research indicates it's overpriced
- If you're hoping to buy an unusual property or one that may be perceived to be higher risk, find a whole-of-market mortgage broker who will have access to a wider range of mortgage lenders
If you have any further questions and would like to speak to one of our expert advisers, don’t hesitate to give us a call on 0330 433 2927 or make an enquiry online.
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