Your mortgage application is in, and your investment plans are well underway. However, the surveyor report comes back with a down valuation on the property; what can you do? Business Development Director and experienced mortgage broker, Jeni Browne, explains what your options are in this situation.
Firstly, don’t panic. Down valuations can happen to even the most experienced property investors. It’s unlucky, but it’s not necessarily the end of the world or your investment plans with that property!
What is a down valuation?
When you apply for a mortgage or remortgage, part of the lender process which determines whether they’ll accept your application is the property valuation. Sometimes, the surveyor sent out to complete the valuation inspection will conclude that the value of the property is less than indicated on your application. It’s also possible for lenders to down value predicted monthly rental figures.
The lender must be confident that the property you’re borrowing money against is actually worth what you (or the seller) says it is. If it’s not, it leaves them open to losing money should it ever have to be repossessed. Furthermore, if you can’t achieve the rent level you’ve based your buy to let mortgage application on, then you are at risk of falling into arrears on your mortgage repayments; something else the lender won’t want.
Why do down valuations happen?
Despite everyone’s best efforts, not even the experts are 100% sure what house prices are going to do, especially during times of economic uncertainty like we’ve seen in 2020. With this in mind, surveyors, usually contracted by lenders to complete valuations, have to mitigate financial risk to their employer, and protect themselves from legal action should issues arise later down the line. Consequently, they are sometimes more inclined to be cautious with valuations. On the other side of the property market process, estate agents, who value properties for sale, will want to achieve the highest possible value for their client as ultimately, this determines their commission. It’s this conflict of interest that can cause down valuations to occur.
What’s the problem with down valuations?
If your chosen lender believes that the actual value of the property you want to purchase is less than the market asking price, while it doesn’t mean the lender will decline your application outright, it can throw a real spanner in your investment works.
The main issue is that it can leave you short of cash for the purchase. For example:
You want to purchase a property listed at £500,000 and require a 75% LTV mortgage, meaning you need to borrow £375,000.
The valuation inspection concludes the property is only worth £485,000. As the lender will only loan you 75% of the property value, this reduces your available mortgage to £363,750, leaving you £11,250 short.
Similar issues occur if the surveyor doesn’t think the property will achieve your predicted rental income. A lower rent prediction can impact your affordability calculations and mean that your chosen mortgage is no longer a viable option.
If you’re trying to raise capital from a property during a remortgage, down valuations can cause a real issue. If the surveyor disagrees with the value you’ve used on the application, it will affect your LTV and potentially restrict the amount of capital you can raise. If you intend to use this capital for future property investments, as many buy to let landlords do, chances are you’ve worked out exactly how much you need. Therefore, any decrease in that amount may have negative knock-on implications for your planned purchases.
What can you do if your desired property is down valued?
Fortunately, there are several things you can do to help get your property investment plans back on track. If you haven’t already, we would recommend contacting a mortgage broker at this point as they will be able to assist you and alleviate some of the stress!
Negotiate a lower offer: if you’re purchasing a property, and depending on the severity of the down-valuation, you may be able to negotiate a lower offer with your seller which matches what your lender considers the property to be worth. Unfortunately, there is no guarantee that the seller will accept your new lower offer.
Increase your deposit: if the valuation is only slightly below the asking price, and you have the available capital, you may be able to make up the difference yourself in the deposit. Of course, if the surveyor has down-valued the property by a significant amount, then the lender may still be unwilling to support the purchase.
Change your LTV: if you have not applied for the lender’s highest available LTV, you may be able to increase the amount of borrowing by ‘gearing up’. As with the above, this will only work if the difference between the valuations is not so significant that the lender is uncomfortable with the deal. It’s also worth remembering that increasing your LTV is likely to attract higher mortgage interest rates, so speak to your broker about how the additional mortgage cost will compare to other available options.
Appeal: you can appeal a down valuation. To do so, you need at least three examples of comparable properties close to your desired purchase which have recently sold for a price which backs the higher value.
This appeal process is also applicable for monthly rental income down valuations. You will need at least three examples of like-for-like let properties in the area which achieve a rent similar to that of your original predictions.
With valuation appeals, the more examples you can gather as evidence, the stronger your case. It’s also important to note that you cannot use properties currently on the market (whether for purchase or rent); the property must have sold, or a tenancy agreement signed. Due to their experience, a broker will be beneficial during this process as they can help put your case to the lender.
Find an alternative lender: using your broker, you can shop around for other lenders which may give the property a more favourable valuation. While there’s no guarantee they will return the valuation you need, by using a broker you may be able to mitigate additional costs by applying for a product with lower or no valuation fees.
If you’ve been hit with a down valuation, or want access to a broader range of buy to let mortgage rates, get in touch with our expert team today on 0345 345 6788 or email email@example.com.