Nearly 400,000 homes have been downgraded in the past year as mortgage lenders poured cold water on sellers’ high price expectations.
According to research by broker Benham and Reeves, an estimated 390,285 homes have been downgraded, putting potential sales at risk and bringing negotiations back to the drawing board.
A depreciation is when a surveyor acting for the buyers’ mortgage lender decides that the price they have agreed to pay for a property is greater than its market value.
The valuations of lenders are based on the prices of comparable properties in the area. If a seller has overpriced their home, they can get a write-down
This means that the bank or mortgage lender will not lend them the full amount they need to buy the house, as they risk losing money on repossession and resale.
According to the report, there was an average variance of between £5,000 and £10,000 for the average depreciated property.
An average decline of £7,500 would lower the average home value by 2.8 percent.
This would represent 5 per cent of the average property price in the North East, or 4.9 per cent in Northern Ireland and 4.3 per cent in Scotland.
In London, where house prices are highest, this valuation adjustment would result in a decline of just 1.5 percent.
What is the valuation of a lender based on?
Unlike other types of real estate investigations that can be conducted during the sales process, a lender’s investigation is not based on the condition of the property or on material, structural or planning factors.
Instead, the inspector will try to ensure that the price being asked for the house is fair, based on other, similar transactions in the area.
According to the RICS: ‘Market value is usually based on comparable market evidence, which typically refers to recent transactions of similar types of properties in the area, other economic indicators and also the professional’s knowledge of the local market and economy.
‘Therefore, it is quite possible that the valuation of the lender at market value does not correspond to the asking price of a home determined by a seller or broker.’
But London has seen one of the highest cases of downward valuations of all British territories, with a whopping 59 percent of transactions according to Benham and Reeves.
It estimates that 47,769 of the 80,965 homes sold in the capital in the past year would be subject to downward valuation.
In the Northwest, 54,043 of the 96,506 homes sold in the past year were reduced, or 55 percent.
Meanwhile, the Southeast is the region where most transactions were hit by a lower valuation by volume.
Of the 137,107 homes sold in the past 12 months, an estimated 60,327 have been written down.
This means that more than 40 percent have disputed their sale price.
While half of all transactions in Northern Ireland were written down, a lower number of homes sold means a total of 12,346 transactions were completed in the past year – the lowest number of any UK territory.
Marc von Grundherr, director of Benham and Reeves, said: ‘Under valuations can be a thorn in the side for those eager to make progress on a property transaction, but unfortunately they are common in the UK property market.
“They often occur because sellers overstate their asking price, but we’re also seeing more lenders asking for a greater degree of caution from appraisers in a market where prices are rising at the rate of knots.
Benham and Reeves’ research was based on a Bankrate devaluation report.
What happens if you receive a depreciation?
Sellers have several options if their home is undervalued.
They can look for another buyer, but they will have to use a different mortgage lender than the one who already lowered the home.
Another option is to wait and hope that the property will increase in value. However, this comes with the risk of losing an interested buyer and there is always the possibility that the value of the property may fall.
House prices have risen dramatically over the past year, with Nationwide reporting that the quintessential UK home saw an 11 per cent rise in August on a mortgage loan basis.
However, some experts have predicted that prices will begin to fall as the stimulus provided by the stamp duty holiday has now been significantly reduced.
If none of the above options work, the seller may be forced to lower the asking price.
Approaching another lender, or renegotiating the price with the seller, can help a buyer push through with the purchase in the event of a decline in value
For buyers, one solution is to approach another mortgage lender and hope they come to a new amount.
They can also renegotiate the price with the seller.
Alternatively, they can try to find enough money to cover the shortfall between the amount the lender is willing to borrow and the amount of their original deposit.
This may mean starting to save or even take out a loan, although these options should be used with caution.
Von Grundherr said, “As a seller, you can find a new buyer who buys through another lender and hope they agree on the value of your home.
“Either you can hold on until the value rises at the risk of losing your buyer, or just accept the lower value of your home.
‘As a buyer, you can also negotiate with the seller or lower your offer, or you can have the property appraised by another appraiser and lender. Otherwise, you risk getting a loan to cover the shortfall or increasing your down payment to cover the costs.’
Lowered valuations are most common when buying a new property, but they can also occur when refinancing a mortgage.
If a homeowner cannot find a lender to give him the mortgage he needs, and his current two- or five-year fixed rate has expired, he may need to switch to his current lender’s standard variable rate, allowing higher levels of mortgage interest deductions. originate. interest.
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