A mortgage down valuation is a frustrating element of any property transaction, whether it be a sale, purchase or refinance and is a growing issue that’s jeopardising many property deals in the bridging sector.
So, what can be done to mitigate the chances of a down-valuation? Part of the problem is understanding what is being valued and how, plus the differing viewpoints from lender to borrower. In short, a lender’s key priority is ensuring the money they lend will be paid back if the worst happens, for example if the borrower defaults and has to sell to get their money back.
The borrower is often emotionally attached to the property and they want to realise the maximum possible sale price for their home to aid their onward purchase or to put more money in the bank. However, because the lender will have no emotional ‘feelings’ towards a property, there are two very different viewpoints to start with and that is before a surveyor even steps foot inside the property.
Understanding how a property is valued for lending purposes is an important part of obtaining property finance, whether it be conventional mortgage funding or short-term bridging finance. It is important to understand what the lender bases their lending decision on. Depending on the lender and the type of bridging loan, the lender may base their maximum loan on ‘open market value’, 180 day value or sometimes 90 day value (also known as forced sale value). These values will typically be 10% to 15% less than the OMV but can be more, with differentials as much as 30% to 40% being seen when comparing OMV and 90 day valuations.
We’re seeing an increasing amount of disparity between the applicant’s opinion of the value of their property, what an estate agent is telling them they can sell for and what surveyors are actually valuing property at. Not for the first time, down-valuations are threatening the market. You could blame stamp duty changes or impending MCD regulation for this although both will no doubt play a factor.
Although most valuations are based on comparables, many properties that often require bridging loans are less common than the standard three and four bed semi house. The top end of the market is likely to experience down-valuations, especially single units priced in the millions. A lack of suitable comparables and the need for a longer marketing period, plus the limited number of purchasers with the financial means to purchase make this top end market vulnerable and less desirable security than a far more ‘average’ property.
Even if the property is well kept, a mortgage down valuation could occur if several run down but comparatively sized properties have recently sold for a lower value. A lack of comparable sales can occur when properties haven’t changed hands for several years. It could be a sign of highly desirable property that rarely comes to market or property that few purchasers want to buy.
If the borrower still wants the property after a down valuation they will have to increase their deposit to match the difference, hence this drop in valuation can act as a fatal blow in any deal and it is killing off some bridging deals altogether.
Lending on properties in the region of £500k to £1m is the key focus for many bridging lenders, as they are often sought after properties which are easier to sell. However, if a property is valued between £2m and £5m, the lender’s potential pool of buyers is reduced which means the chances of reselling in the future is also lower, which could make a lender more reluctant to lend on it.
Many lenders feel anxious about lending on mixed use properties. They feel they are exposing themselves to risk and worry that the property will get less at auction due to the commercial part of the property negatively affecting the value of any residential flats.
Down valuations are an increasing issue for many intermediaries and their clients and, due to the growing dissatisfaction, we urge the intermediary community to remain vigilant and the borrower should be made fully aware that down valuations are a possibility.