Home buyers are increasingly finding it difficult to secure the mortgage they need on their chosen property thanks to rapidly rising house prices. This is thanks to a rising number of down-valuations,the situation where a surveyor values a property at below the agreed sale price.
Surveyors are struggling to keep up with rising prices and are nervous about repeating mistakes made in the run up to the global financial crisis.Keep reading to find out more.
Borrowers forced to make up shortfall when a down-valuation occurs
Lenders use valuations from their appointed surveyors to decide how much to lend and at what rate. Where a surveyor down-values a property it can leave a mortgage borrower with a shortfall or put them in a position where they need to find a larger deposit to buy.
For example, if a buyer agrees a 200,000 purchase price for a property with a 20 per cent deposit of 40,000, they will source a mortgage for 80 per cent loan-to-value (160,000) at a set rate of interest.
However,if the lenders surveyor decides the property is worth only 180,000, the bank will advance only 80 per cent of the lower amount, or 144,000. This leaves the buyer with a 16,000 shortfall.
If they decide to more, their loan to value will rise along with their interest rate, making the loan more expensive.
Peter Bolton King, residential director at the Royal Institution of Chartered Surveyors, said the problem was indicative of a rising market. This is because surveyors base their valuations largely on so-called comparable evidence such as recent sale prices in the same area for similar properties.
He said the problem was also exacerbated because surveyors were nervous about overvaluing homes. When prices fall, as they did during the financial crisis, lenders first tendency is to sue surveyors for overvaluing, he said. As a result, surveyors have to be very certain they can evidence the value they have put on paper.
Mr Bolton King said buyers shouldn’t necessarily withdraw from a property purchase simply because of a down-valuation. You have to remember why a valuer is there they are working on behalf of the lender, not the buyer, he added. If you really want a property and you think it is worth a certain amount then a low valuation shouldn’t stop you buying it.