Down Valuation: Is Your Mortgage Valuation Survey Undervalued?

Has your mortgage valuation survey undervalued your property? Learn what a down valuation means, the effects on buyers and sellers and what you can do.

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When selling a home, it’s a battle between 2 parties. The seller wants to maximise their ROI (return on investment) and the buyer wants to get the best deal they possibly can.

Lenders require a surveyor to perform a mortgage valuation survey. For sellers, there is a risk of down valuation – where a surveyor values the property for less the agreed purchase price between the seller and buyer. For both parties, this can stop the mortgage process in its tracks.

Continue reading as we explore down valuations on properties and steps to take in the event of a down valuation.

How Are Properties Valued in the UK?

In the UK, the Royal Institution of Chartered Surveyors (RICS) is a group body of mortgage surveyors that follow strict standards when performing property valuations and surveys. RICS conducts a range of different types of house surveys for buyers.

For a property valuation survey to be RICS-compliant, surveyors must follow International Valuation Standards (IVS). See below for a brief overview of assessment factors:

Property Condition

The condition of a property can affect how it is valued.

RICS surveyors use 4 condition ratings when surveying the condition of a property:

1 or Green – No repair needed, element should continue to be maintained as is
2 or Amber – Non-critical defects identified, advised to monitor and repair
3 or Red – Critical defects that need urgent repair or replacement
NI or Not Inspected – Surveyor was unable to inspect this element of the property

These condition ratings are applied to this non-exhaustive list of property elements:

Chimneys
Roof coverings and tiling
Rainwater pipes and guttering
Main and interior wall integrity
Doors and windows
Floors and ceilings
Foundations
Asbestos and fibreglass
Lead pipes
Outbuildings
Electrical circuits
Garden

If a structural wall is damaged, this can put occupiers at risk of being hurt. Foundations can experience subsidence, where the property sinks into the ground and threatens structural integrity. Lead piping and asbestos also pose a health and safety risk.

The condition of the property is a significant factor in determining the FMV (fair market value). Buyers may need to pay for repairs and redevelopment in order to secure a mortgage, which increases the cost of the process and potentially how much they need to borrow. Low condition ratings commonly lead to undervalued properties during the mortgage process, also known as a down valuation.

Average Property Sale Values in Local Area

The sale price of properties in the local vicinity can influence the maximum sale price for your own property. Property value can also fluctuate between different types of houses. Consider watching our video if you’re wondering whether the property type affects your mortgage.

It will be difficult to justify a £300,000 sale price when equal properties on the same street are selling for £250,000.

Overall, surveyors aim to find a recently sold property that is almost identical in terms of structure, design and features. This gives the best estimate of your own property value.

Additional factors include:

Proximity to public services like hospitals and schools
Location: such as on main roads, the waterfront, etc.
Proximity to loud venues like nightclubs, pubs and other licensed establishments
Air and noise pollution levels

You can find sale price data for properties in your local area. This data has a latency of about 3 months to the market but can be useful in understanding local property values. Some websites that offer this are:

Property Supply vs Demand in Local Area

The average property sale value is almost always determined by local supply versus demand.

High demand in the local area leads to a higher mortgage valuation due to a lack of supply, leading to competition between buyers.

If it seems everyone is selling their property in your area, buyers have more negotiating power with more supply than demand. A mass exodus of property owners could also signal to buyers that the area is undesirable and raises the question, why are people trying to leave?

Macro-Analysis of Prevailing Market Conditions

Where micro-analysis focuses on a small local catchment area, macro-analysis relates to the property market conditions for an entire town, city, county or country.

The factors are wide-ranging and unpredictable in some cases. Here are some examples:

Bank of England interest rates rise, leading to higher mortgage costs and lower buyer demand
Economic growth versus a recession
Average market property price trajectory going down, staying steady, or going up
Market trends, such as London residents moving to rural locations, due to the availability of remote work
Government mortgage policies such as Help-to-Buy, Rent-to-Buy and Shared Ownership

Protect the Value of Your Property with the Right Home Insurance

Protecting your home and property is an essential requirement when taking out a mortgage. Every mortgage lender requires building insurance before they can accept your mortgage offer. Additionally, buyers should consider contents insurance and life and mortgage protection insurance for peace of mind.

Leasehold properties may include home insurance as part of the monthly or annual maintenance charge. Otherwise, buyers purchasing a freehold property will need building insurance for the mortgage to be approved.

At John Charcol, we can help you find the right home insurance deal for your needs and situation. Our experts will make sure your insurance policy covers the full rebuild value of your property, protecting your investment far into the future.

What Is a Down Valuation on a Property?

Now that we understand how properties are valued, let’s explore down valuation.

Here is a scenario that explains the prospect of a down valuation on a property:

Jack has a 3 bed property he’s looking to sell. He pays a mortgage surveyor to determine a property value – the surveyor decides on £300,000.

Jill is interested in buying Jack’s 3 bed property. Jill’s bank or building society sends a mortgage surveyor to perform a valuation survey – the surveyor only thinks the property is worth £285,000.

This means Jack has experienced a down valuation on his property of £15,000.

Jill cannot continue at the £300k asking price. The FMV is £285k as set by her surveyor, meaning she’s trying to borrow more than the property is worth.

Jill has 3 options here. She can:

Renegotiate the purchase price down with the seller so it’s in line with the valuation
Increase the deposit to try and make up the difference between the fair market value and the purchase price
Pull out of the transaction

Speak to a mortgage adviser

How Common Is a Down Valuation on a Property?

According to HBB Solutions, almost half of UK properties listed on the market were down valued during the COVID-19 pandemic. To illustrate this point, HM Land Registry data shows that out of 1.95 million property transactions 866,906 properties were down valued between January 2020 and January 2022.

Here is the percentage of properties that were down valued per country in the UK during this period:

Wales – 63%
England – 45%
Scotland – 31%

Next, let’s focus on the percentage of down valued properties in England specifically:

London – 59%
Yorkshire – 58%
East England – 31%
East Midlands – 27%
South West – 26%

Further reports from Benham and Reeves show that of those properties that were down valued, the average change in value was between £5000 to £10,000.

What Causes a Down Valuation on a Property?

This could be due to property condition, deviation from average property sale price in the local area, property supply versus demand and prevailing market conditions.

A down valuation comes from the valuation arranged by buyer’s bank or building society.

How Quickly Will I Know About a Property Down Valuation?

Down valuations come later rather than sooner.

Once you agree to a sale with a buyer, the buyer then applies for a mortgage with a lender. As part of mortgage checks, the lender will send a surveyor to perform a mortgage valuation. It’s best to organise a DIP before making an offer. In Scotland, you need to have a DIP before making an offer on a property.

Finding out about a property down valuation can happen anywhere from 4 – 8 weeks into the mortgage application process.

What Are the Effects of a Property Down Valuation for Buyers and Sellers?

Let us explore the effects of an undervalued mortgage survey on a property for buyers and sellers, respectively.

How Does a Down Valuation Affect Sellers?

In most cases, a down valuation stops a property sale in its tracks.

As a seller, you may receive a counteroffer from the buyer at a lower sale price. If you do not agree to this price – and the buyer can’t make up the rest in deposit – the sale will fall through. Furthermore, as months may have passed since the initial offer, any alternative buyers you had may have already found another property.

If you’re stuck in a property chain as a seller, a down valuation could also prevent you from buying your onward property.

How Does a Down Valuation Affect Buyers?

Even if a buyer is happy to pay the purchase price, the lender bases what they’ll lend on the FMV. This means that the buyer won’t be able to borrow as much and therefore may not be able to afford the amount the seller is asking for.

Buyers have a number of options when a down valuation occurs:

Renegotiate with the seller at the FMV as determined by the mortgage valuation
Raise more funds for the mortgage deposit to make up the difference

Can a Purchase Mortgage Down Valuation Lead to Mortgage Retention?

A down valuation wouldn’t ever really lead to a mortgage retention as it’s an option in a completely different situation.

A mortgage retention is where a portion of the total loan amount is given to the buyer, on the condition that the property is renovated and repaired to achieve a sufficient market value. After repairs are complete, and a new mortgage survey comes back with a sufficient market value, the remaining loan amount is given to the borrower.

What Happens with a Property Down Valuation and Remortgaging?

If you start to remortgage and end up having a down valuation on your property, this essentially lowers the percentage of equity you’ve built up in your property.

Let us explain:

You originally bought a property for £200,000 with a £20,000 deposit and £180,000 mortgage (90% LTV)
Over the years, you’ve reduced the outstanding loan amount to £170,000
You’re out of your fixed term now, so you decide to remortgage onto a cheaper product at a lower LTV
During the remortgage process, the surveyor down values your property from the original £200,000 to £180,000
In this situation, the outstanding mortgage doesn’t change – it’s still £170,000
This means that you now have less equity built up in your property and the products available to you will be at higher LTVs (in this example 95%)

If you experience a down valuation when looking to remortgage, you may find that a product transfer is more suitable for you. When sticking with an existing lender, property values are index-linked from the date of the previous mortgage application. This makes the process less volatile and reduces the risk of a significant down valuation.

If you remortgage with a new lender, it’s more likely a surveyor will perform a valuation on the property. They cannot use an index-linked figure. This could lead to higher interest rates or a higher LTV if a down valuation occurs.

In the event of a down valuation, it’s important that you read the surveyor’s report so that you can understand what has caused this decrease value.

How Can a Mortgage Broker Help When a Property Down Valuation Occurs?

You should reach out to a mortgage broker like John Charcol for advice in the event of a property down valuation. We have access to a panel of hundreds of lenders, which means we can find the right solution for you and the property you want to purchase.

Furthermore, if your lender refuses to provide a mortgage after a down valuation, your mortgage adviser can negotiate with them or identify a new lender with a more suitable LTV and affordability criteria.

Is Property Down Valuation Actually Real, or a Myth?

Some may argue that down valuation is an inaccurate term as it refers to when a property has been assessed and assigned a value by the surveyor, which reflects the fair market value. It hasn’t gone down in value, instead the valuation has revealed that the asking price put forward by the seller is greater than the FMV.

Down valuations should be considered as an accurate image of the current market value.

Reach out to one of our specialist mortgage brokers at John Charcol for advice on property down valuations and what options are available to you.

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Down Valuation: Is Your Mortgage Valuation Survey Undervalued?

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