When you find your dream home and you are willing to pay the full asking price, your lender may come back to you with a lower valuation by as much as 20%! Although property prices are booming due to the pent-up demand caused by the Stamp Duty Holiday, low deposit mortgages, and homeowners looking to move into a new home to accommodate their needs since the first national lockdown took place, lenders are being cautious as they are looking at the future economic outlook.
Lenders are looking at many factors, including how the economy will shape up after the current demand starts to taper off, alongside the economic outlook once the Furlough Scheme comes to an end and how businesses will cope well into 2022 and 2023, which in turn will shape the employment market.
A lender will down value a home when a surveyor who is acting on behalf of the lender reports back with a significantly lower valuation price than the one agreed between the buyer and seller. A lender will then revise the mortgage offer with the recommended price from the property surveyor.
For example, a buyer and seller have agreed on the property price at £500,000. A surveyor will then visit the property and may feel that there is not enough evidence to support the agreed price and lowers the property valuation to £450,000.
As a seller in the current market, you may have had high hopes of commanding a high price for your home, given the current demand levels. And the race to cash in on the stamp duty holiday (recently extended until the end of June with a tapering-off period until the end of September) means demand for properties - especially family homes - is high.
But those hopes could be severely dashed by a down valuation.
There are several reasons why a devaluation may occur:
- Some owners will have an unrealistic idea of the value of their home. Or they may be over-optimistic about the amount of value their renovations have added to their property – and will put an over-ambitious price tag on their place.
- Estate agents desperate to get sellers onto their books may provide inflated valuations, which may later be rejected by professional surveyors providing their valuation to lenders.
- Lenders concerned about over-inflated prices may be telling valuers to be cautious.
- Some surveyors have been so overstretched; they have been required to value properties outside of their usual area of expertise. So some may have been unfamiliar with the nuances of the local markets.
- Some banks have used so-called ‘desktop valuations’ meaning the surveyor hasn’t actually visited the property during the lockdown. The surveyor may not even be aware of works or improvements that have been carried out. If this is the case, with lockdown easing, your buyer may now have an opportunity to ask the surveyor to visit the property in person to re-evaluate their decision.
According to research by Bankrate UK, a mortgage comparison site, figures show that in the first six months of the Covid crisis (March to August 2020), 46% of properties were downvalued by lenders. According to their research, homes valued between £400,000 and £500,000 were the most affected properties.
In no small part due to the perfect storm of the pandemic and Brexit, the volatile economy has left mortgage lenders nervous.
This uncertainty has led to an increase in down valuations, in some cases by up to as much as 20%!
Looking forward, lenders are also fearful of a potential dip in property values when the stamp duty holiday does finally come to an end – as buyer demand may decrease at that time.
While down valuations are most commonly associated with selling (or buying) a home, they can also prove problematic if you’re looking to remortgage and switch to another mortgage deal without moving home.
Typically, homeowners remortgage because their current arrangement – such as a two-year or five-year fixed-rate mortgage – has come to an end.
But if the lender determines your home is worth less than you believe it is, your application to move to a new lender could get rejected. There may be little option in some cases but to move onto your existing lender’s standard variable rate (SVR), which could mean a hefty jump in your monthly mortgage repayments.
Properties are valued based on a number of factors. They include:
- The overall condition of the house or flat – along with the size (‘square footage’) and the amenities it has (for example, the number of bedrooms, if it has an office or garden etc...)
- The sale price of at least three similar local properties in the last six months. This gives an indication of the amount buyers are willing to pay for homes in your area
- Knowledge of supply and demand in the local area
- An understanding of the prevailing market – how hot or cold it is, and which way it’s moving
What can you do if down valuing happens to you as a seller?
If you’re looking to sell and your home gets down-valued, here are some things you can do:
- Find a new buyer with a different lender willing to value your home at the price you think it’s worth
- Be willing to lower the asking price
- Spend money to address the reasons for the down valuation
- Wait to see if the property rises in value. But by doing this, you risk losing the interested buyer. There’s also a risk your property could go down in value, rather than up
What can you do if down valuing happens to you as a buyer?
If you’re hoping to buy, but then get a devaluation from your lender, here are some tips to help you avoid missing out on your dream home:
- Get the property valued again by a different surveyor acting for a different lender
- Try to renegotiate the price with the seller – or simply lower your offer
- Get a loan for the shortfall
- Increase your deposit to cover the cost of the devaluation – though this may mean dipping into savings meant for other costs
Whether you are looking to Buy, Sell or LET, speak with one of our property professionals today by calling us on 0116 275 8888!
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