As part of any mortgage approval for a property purchase, the bank will require the property to be valued. The purpose of this is to clarify the proportion that the bank is lending as against the open market value of the property. This is known as the loan to value ratio (LTV).

The LTV dictates rate of interest on which the bank will lend. If the amount of the loan is small as against the overall value of the property, the bank’s risk of loss if there is a failure to repay the loan is less. As a consequence, the lower the LTV, generally the lower the interest rate that will be charged on the loan.

How is a mortgage valuation survey undertaken?

In all cases a mortgage valuation will undertaken by a qualified surveyor, that is to say a member of the Royal Institute of Chartered Surveyors (RICS). The valuation of an estate agent is different and will not be relied upon by a bank. An estate agent’s valuation provides a guide at which the property might be sold and advice as to marketing. A mortgage valuation survey will inevitably be more cautious, in effect assessing a bottom line value at which the bank might be able to sell the property if it had to foreclose on the mortgage.

Each bank has a panel of surveyors that it uses for mortgage valuation reports. The bank will nominate a surveyor from that panel. If, however you are aware of another surveyor on the panel who already knows the property, it might be advantageous to recommend that the bank appoints that particular surveyor in the hope that a speedier valuation can be achieved.

The surveyor will inspect the property and then review the proposed sale price against values achieved for similar properties in recent months. Those other comparison properties will give a guide to the surveyor as to the market value. 

The surveyor will also identify whether the property is suitable as security for the loan that you have applied for. If there are significant defects, the surveyor will highlight those in his report and the bank may ask you to get quotations for repairs and give an undertaking that those repairs will be completed within a fixed time scale after purchase.

If you are taking a mortgage on a buy-to-let basis, the valuation survey will also include an estimated potential rental value.

It is only once a satisfactory mortgage valuation report has been provided to the bank, that they will formally issue to you the offer letter setting out the terms of the loan. It is important therefore that the valuation process is moved forward promptly.

You will be required to discharge the costs of the valuation report. Costs vary considerably depending on the nature and the value of the property. You should ask the bank to provide you with a fee quote.

What information beside a valuation could a mortgage lender ask from you?

If the property is a new-build then the mortgage lender might ask for copies of a structural defects warranty. These are warranties given by the builder backed by an insurance company to cover the cost of any defects that might arise over a ten-year period from completion. Because of the usual ten-year period, these are sometimes known as decennial insurance policies.

Cladding systems to blocks of flats have been much in the news in the U.K., but less so in Jersey. If, however there is a known potential defect or similar problem which needs to be addressed, then the lender may well ask for a detailed report from a structural engineer and quotes for repairs.

Jersey has a system requiring fire certificates to be issued for homes that are in multiple occupation and blocks of flats. All banks will require confirmation that a valid fire certificate is in place for any property where that applies.

What happens if the valuation is less than the agreed sale price?

The assessment of a property’s value by an estate agent, or you as buyer, may well be different from the value that a qualified survey or will ascribe to the property. In those situations, a reduced valuation will mean that you either cannot borrow the full amount originally requested, or the loan to value ratio will change, therefore impacting the interest rate at which you can borrow.

Alternatively, armed with the report of the reduced valuation, you can seek to renegotiate a lower sale price with the seller so that the loan to value ratio can be maintained.

What’s the difference between a mortgage valuation and a property survey?

The mortgage valuation has as its sole purposes, an assessment as to the market value, the suitability of the property for lending generally and an indication of any material defects that might affect saleability.

The valuation report is addressed solely to the bank and you as buyer cannot rely on its findings. Thus, when buying a home, it is always good to have your own property survey for your own purposes to identify any potential issues.

Depending on the age and condition of the property, there are different types of surveys that you can obtain. The most basic survey is a RICS condition report. Alternatively, a RICS home-buyer report provides a more thorough examination. Finally, the most comprehensive (but therefore the most expensive) report would be a full structural survey identifying all issues in all parts of the property.

It might also be appropriate to get reports on selected areas relating to the property where there are known issues, for example, drainage condition, electrical installations or wet or dry rot.

Key points to take away

The mortgage valuation report is critical to the purchase and borrowing process. Have in mind: -

• The purpose of the survey is principally to identify the value of the property and accordingly the appropriate LTV ratio.
• The report is addressed to the bank and not to you as buyer and you cannot rely on it.
• If the valuation is less than the price agreed, you may have to renegotiate the sale price or your mortgage arrangements.
• It is important therefore to move quickly on the valuation report so that delays do not arise.
• It is always important to get your own assessment of any property that is likely to need repair or upgrading.

Abigail Watkins is a Solicitor in the property team at Benest & Syvret, one of the busiest conveyancing law firms in Jersey. She has over 30 years of experience in the legal world and regularly advises clients securing residential mortgages, buy to let mortgages and equity release loans. If you are taking a mortgage for any purpose, contact Abigail on 875875 for in-depth advice.