Could fear of a potential future legal challenge and Professional Indemnity Insurance claims be at the heart of the “down valuation” survey culture which is causing significant issues for some would-be homebuyers?
House Prices showing significant growth
According to a report by the Halifax, one of the UK’s biggest mortgage lenders, house prices rose by 2.4% in February 2014 and by 7.9% year-on-year.
Further reports suggest that price rises in London and some areas of the South East are more than double these figures.
The impact of LTV and mortgage valuations
If a property is being purchased using a mortgage, it is common practice that lending is subject to a property valuation survey.
The figures from this survey are then utilised to determine the LTV (loan to value) availability of funds which the lender will allow.
For example, Mr & Mrs Bloggs are looking to purchase a home for £450,000, they have a deposit of £90,000, which determines an LTV of 80% for mortgage purposes and interest rates and availability of funding is based on these multiples.
After agreeing on the purchase price with the vendor, the valuation survey returns a valuation of £420,000, leaving a shortfall of £30,000.
The impact of the valuation shortfall could be that:
- The mortgage offer is no longer valid
- LTV is impacted, and interest rate may increase
- Or in the worse case, a mortgage offer is no longer available as the deposit does not meet the minimum LTV multiple
What has this got to do with surveyors?
Valuation surveyors are independent of the mortgage lenders, and it has been suggested that they are taking a cautious approach which is out-of-step with rising house price inflation.
Residential director at the Royal Institution of Chartered Surveyors, Peter Bolton King, said the problem was indicative of a rising market.
Surveyors base their decisions largely on so-called “comparable evidence”, such as recent sale prices in the same area for similar properties.
As such, it may be that the reviewed data is already out-of-step with the current market.
Where does Professional Indemnity Insurance fit in?
Chartered Surveyors professional Indemnity insurance protects them against legal claims for losses resulting from their professional advice.
During the last recession, PI insurers received a significant number of claims from mortgage lenders where it was alleged that the property valuation was inflated.
As the lender had based their lending decision on this information and now found that they had a shortfall of funds, following repossession and sale, they were looking to the surveyor for compensation.
Mr Bolton King commented “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.”
What can you do if your property valuation is short of expectations?
It may not be a complete disaster as several options are available, the key is not to panic and keep your estate agent in the loop:
- Renegotiate: The independent report itself can be used as a renegotiation tool, and you may be able to lower the purchase price.
- Find additional funds: Easier said than done, but you could add additional capital to fund the deposit shortfall based on the amended loan-to-value.
- Review mortgage offer: Discuss options with your lender, it may be that a revised mortgage offer is available based on a reduced deposit percentage.
Re-building Sum Insured vs valuation
The valuation survey will also include a suggested re-building sum insured for the property.
This is the sum insured you need to provide to home insurers or buy-to-let insurance providers when calculating buildings insurance.
A common error is to give the property value, which can often differ significantly to the re-building cost.
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