Better Business
Ask The Expert: Should loans rely on purchase price not valuations?
Richard Sexton, business development director at e.surv Chartered Surveyors, answers on why mortgage lenders choose to use a property’s purchase price rather than valuation to calculate a loan.
Q: Why do lenders persistently use the house purchase price rather than valuation to calculate a mortgage loan?
For example, if neighbourhood properties of similar type and in similar good condition are valued at, say, £125,000 per capita, but one vendor is willing to sell for significantly less, does this action negatively effect the real value of the vendor’s property?
This current lender practice affects the borrower when purchase price is used to calculate loan to value, a practice which ignores the real, market value of an asset.
One could argue that lenders are instructing RICS down valuation in order to attract a higher lending rate, using artificially inflated proportional lending – loan-to-purchase.
A: The value of any property is what someone is prepared to pay for it, assuming a willing buyer and seller.
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In my experience, lenders do use the property valuation far more frequently than the purchase price, although in most circumstances this should actually be the same figure in any case.
For remortgage cases, there is of course no purchase price, so the only figure available is the valuation.
The example given sounds a little artificial. If property is achieving £125,000, why would anyone accept anything less?
That said, whilst any decent valuer will take notice of the lower sale price, it should only form part of a wider picture of evidence used to calculate a value.
If something looks out of line, I would expect a valuer to investigate and take account of the circumstances, making an adjustment such that the subject property was valued appropriately.
With falling prices, some properties are crossing over LTV lines and I do sympathise that small differences in figures can have big impacts on the overall cost of the loan.
The issue would perhaps not be so crucial if lenders were able to be flexible to some extent at the boundary levels which trigger product changes.
Ultimately, lenders have got far better things to do with their time than attempt to misdirect an entire industry. This simply doesn’t happen and wouldn’t work if it was attempted.
Presumably, if lenders want to charge a higher rate, they vary the product range to do so.