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When is a valuation not just a valuation?

by: Alison Beech
  • 16/12/2011
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When is a valuation not just a valuation?
At first glance, it would be fair to assume that a valuation conducted for an equity release mortgage would be no different from that for required for more standard mortgage funding.

But on closer inspection there are some shifts in emphasis that are crucial for a lender and prospective borrower to understand when assessing the risks and benefits of undertaking such a loan.

The two crucial factors that determine the amount that can be released on equity release schemes are the age of the youngest homeowner, which should be a minimum of 55, and the value of the property.

Depending on the scheme there are two key considerations.

Firstly, according to the Royal Institution of Chartered Surveyors (RICS) Red Book Guide, home reversion valuations, unlike conventional residential mortgage valuations, can include any development potential of a property.

Whether planning consent or merely prospective potential, when the title to the property and the benefit of any development potential pass to the lender on completion, this potential is effectively deferred until the company realises its value after the applicant has died.

This means development potential could be released during the life of the applicant with his or her consent.

Of course, assessing the value of development potential is sometimes difficult as many issues such as planning, highways, and services affect it. Valuers sometimes refer to this as “hope” value. On its own it cannot form the basis of a valuation for lending purposes but does constitute a legitimate consideration.

Secondly, lifetime products have no redemption date but for the death of the mortgagor and no repayments of capital are made.

The interest is ‘rolled up’ and compounded over the mortgage term, so the total debt to be redeemed upon the death of the mortgagor is much greater than with a conventional mortgage.

The RICS guides valuers to include comments on the sustainability of a property, especially in respect of features of design, condition and location that may influence value over a longer term.

Many lifetime mortgage lenders also place great emphasis on maintenance items and the timing of essential repairs as a condition of the mortgage.

Of course, individual lenders will have their own particular instructions and parameters for lending on these products which supplement the RICS guidance.

It is clear too that, with average property prices having fallen across many parts of the UK, equity release applications, particularly where people are looking to maximise releases to cover repayment of debts such as mortgages, have been affected.

However, as we are seeing at Valunation, the trend is one of a growing market that brings some very subtle but specific considerations to bear for valuers.

Alison Beech, head of Valunation and business relationship director at Spicerhaart

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