21 November 2023
Author: Andrew Jones
Whether you’re a business owner looking to purchase a new property or remortgage, or you’re a homeowner looking to do the same, a down valuation can come as a nasty surprise.
But what exactly is a down valuation, why do they happen and what can you do about it?
In this blog, we’ll answer the above questions, ensuring you understand everything you need to know about down valuations, both for businesses and individuals.
What is a down valuation?
When you take out a mortgage or remortgage your existing property, there will be a property valuation.
The initial valuation (often provided by you or your estate agent) can be reduced when the surveyor sent by the lender comes to perform a valuation inspection. A surveyor may conclude that your property is actually worth less than the price you have listed on your mortgage application.
Frustratingly, property valuations are growing increasingly inconsistent, and your down valuation can happen months into the property purchase process, slamming the brakes on an already relatively slow process.
Why does this happen?
This happens because lenders want to be confident that the property you’re borrowing money against is worth what you say it is. If not, they may well lose money should you default on your mortgage.
Lenders need to know that a property will cover their costs if it ever needs to be repossessed.
Not only this, but if you’re looking for a buy-to-let mortgage and you’re unable to achieve the level of rent you’ve based your mortgage application on, then you run the risk of falling into arrears – an obvious cause for concern for any lender.
What can happen to your purchase if the property is down valued?
Some property purchases fall through, others don’t. We’ll go into more detail on what you can do to improve the situation later on.
Before we do, here’s an example of what a down valuation might look like: imagine that the property you’re looking to purchase is listed at £600,000, and it requires a 75% loan-to-value ratio (LTV). In this instance, you’ll need to borrow £450,000, with a deposit of £150,000.
The valuation inspection determines that the property is actually only worth £580,000, which means you’ll only be able to get a mortgage for £435,000. In order to get to the listed value of £600,000, you’ll now need to find an extra £15,000 to cover the deficit.
While frustrating, it’s not all bad news, and many property purchases that suffer a down valuation still manage to complete in due course.
Why are down valuations becoming more common?
Even the most competent mortgage advisor/estate agent can find that their valuations are deemed incorrect.
Generally speaking: estate agents are more likely to inflate a property’s value as sellers are more likely to choose them, while lenders’ surveyors are proving more cautious, leading to an increase in down valuations.
It’s par for the course, especially in our current economic climate.
Traditionally, most surveyors broadly agree on property prices, but as interest rates continue to rise, and we’re still reeling from the impacts of the Covid-19 pandemic; it’s no wonder that lenders are on edge.
In fact, more than half of pandemic property purchases in the UK were subject to down valuations (between 2020 and 2022). Despite us being past the worst of the pandemic anxiety, many surveyors are still being careful due to rising interest rates.
What can you do if your property is down valued?
So, the property you’re working on has been down valued, is there anything you can do?
The short answer is yes, and our first tip is potentially the most important:
1. Don’t panic!
It’s very easy to panic when suddenly hit with a down valuation.
However, it’s the nature of the beast, and down valuations can happen to even the most experienced property investors.
Sure, it’s unlucky, but it’s not the end of the world. Keep a level head and it’ll be little more than a bump in the road.
2. Negotiate a lower offer
Depending on the severity of the down valuation, you may choose to negotiate a lower offer with your seller to match the new valuation from the lender. Of course, there’s no guarantee that the seller will accept your new offer, and you may need to seek a middle ground to continue with the property purchase.
3. Increase your deposit
If the down valuation is only slightly below the asking price, you may choose to simply make up the difference to avoid any further delays.
However, if the property has been down valued by a significant amount, the lender may not be happy supporting the purchase, but this will vary from case to case.
4. Change your LTV ratio
If you have yet to apply for the highest possible LTV ratio, now might be the time to do so.
You may be able to increase the amount you’re borrowing in this way (also known as ‘gearing up’). Remember – higher LTVs often result in higher mortgage interest rates, too, so it’s important to weigh up whether the increase in monthly payments is worth it for you.
5. Appeal the down valuation
It’s possible to appeal your down valuation if you feel that it’s unwarranted.
If you want to take this route, you’ll need, at minimum, three examples of similar properties that are close to the property you wish to purchase and have sold for a similar price. This will affirm that the property is worth the value that it’s listed for.
The same principle applies for buy-to-let mortgages – if your monthly rental projections have been down-valued, you can find like-for-like properties in the area which are currently being rented at a level similar to your original predictions.
6. Find a different lender
If you’re partnered with a competent, experienced broker, you’ll be able to shop around for other lenders, many of whom may give the property you’re looking to purchase a more favourable valuation.
While this isn’t guaranteed, your broker may be able to help.
For example, at Rapid Bridging, we’ve built strong relationships with brokers across the UK. We’re able to leverage these relationships on behalf of our clients, which means we can often find a product with lower or no valuation fees.
Whether you’re a homeowner working on a residential purchase, you’re a business looking for a commercial mortgage, or you’re a landlord looking to secure a buy-to-let mortgage, our friendly team are here to help.
Even if you’ve had a property down valued, there’s still processes to follow!
