Lending for what it's worth

In a rising property market, a property valuation is usually a formality. Paying for the bank or building society's surveyor to inspect the house or flat is an unavoidable cost, but buyers will be more interested in the survey report than the valuation. There is every chance that any valuation will be out of date by the time they move in.

In a rising property market, a property valuation is usually a formality. Paying for the bank or building society's surveyor to inspect the house or flat is an unavoidable cost, but buyers will be more interested in the survey report than the valuation. There is every chance that any valuation will be out of date by the time they move in.

In a flat or falling market, though, the picture is very different. Lenders worry about being left with a hard-to-sell property, should the buyer fall behind with his or her payments. If prices fall far enough, lenders could face having to sell at auction for less than the amount of the mortgage.

One way lenders deal with this is by lending a smaller percentage of a property's value. Already, a number of lenders have restricted their loan to value ratios in parts of London they believe are overvalued.

Lenders can also control their risk by taking a more conservative view on the value of the property itself, with surveyors reporting that properties are worth less than the asking price. "The housing market has slowed in recent months and there has been a lot of talk of further falls in prices," says David Hollingworth of mortgage brokers London & Country. "This often leads to a more conservative approach from valuers and there is certainly evidence of properties being downvalued in recent months, although not to critical proportions."

But for a buyer, a valuation that falls short of the asking price can be a shock. In a worst-case scenario they face losing the property. Estate agents and mortgage advisers report that some downvaluations are running to tens of thousands of pounds. This can directly affect many buyers' abilities to go ahead with a purchase, unless the seller is willing to cut the price.

The main problem, according to Mr Hollingworth, is that a downvaluation can affect the loan to value ratio of the buyer's mortgage. If the downvaluation pushes the loan to value over 90 per cent, the buyer could face paying a higher lending fee or mortgage indemnity premium. And, as not all mortgage deals are available for loans over 90 per cent, they may face paying more for their loan.

The alternative is for the buyer to pay a higher deposit. For a buyer with a reasonable amount of equity to put in to a purchase, a small downvaluation may not cause too many problems, although it might prompt them to question the property's asking price.

But not everyone will be in a position to do this; despite the weaker recent market, many buyers still face stretching themselves to buy the home they want.

It might be possible to switch to a different lender that does not charge a higher lending fee, but the delays this will cause could cause the transaction to fall through.

Switching lenders may allow buyers to avoid a higher lending fee, but it is not a guaranteed way to achieve a higher valuation for a property. As the major lenders use a limited number of surveyors in each area, it is unlikely that valuations will vary much from lender to lender.

As Jeremy Leaf, residential housing market spokesman for the RICS points out, a different lender might even hire the same surveyor to value the property.

Buyers can, though, appeal against a lower valuation. According to Leaf, some buyers do this and it can be successful. In some cases, the buyer may have researched the market thoroughly and can point out that there are no homes to buy at the lower valuation.

There are no guarantees of success here, though, and it may well be that the valuer is taking the view that asking prices in an area are not sustainable. The valuer works for the lender, not the buyer, and it is the lender's interest that he or she needs to consider. This can lead to a more conservative view on price.

And a valuer's decision could also be based on a factor that the buyer has overlooked, such as the condition of the property or its location. In a rising market, a problem such as damp, subsidence or a less than favourable location might not be critical either to the buyer or to the lender, as even less than perfect properties sell quickly. But in a quieter market, buyers are that much more likely to shun the imperfect. The lender's valuation will reflect this reality.

In these circumstances, the only real recourse the buyer has is to go back to the seller with a lower offer. As Leaf cautions, if one surveyor downvalues a property, even if the seller re-markets the property it is highly unlikely that another buyer's valuer will go against the original decision. And in a flat or falling market, the seller may not want to argue with the valuer's view and risk missing out on a sale.