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What is a mortgage valuation and how does it work?

A mortgage valuation is a specific type of assessment done by the mortgage lender to help them confirm the property’s value. It’s also used to see if the property will be a suitable security for the loan you’ve applied for. Your lender will usually arrange a mortgage valuation.

What is a mortgage valuation used for?

Alongside confirming the property’s value and suitable security for the loan, a mortgage valuation also helps the lender work out the loan-to-value (LTV) ratio. This is the amount you want to borrow in relation to the value of your home. The LTV determines the mortgage rates you are eligible for.

It’s important to note that a mortgage valuation is carried out for the lender’s purposes only, and not on your behalf. 

An estate agent’s appraisal or valuation is not the same. These are made by the estate agent with a view to advising the owner of the property what they should place it on the market for. 

What does a mortgage valuation involve?

Mortgage valuations are completed by qualified surveyors, or calculated using an Automated Valuation Model (AVM). Your lender will arrange for this to happen. 

The surveyor doesn’t always need to visit the property to carry out the valuation, and they can be done fairly quickly – often within 1 to 2 weeks. 

The lender will then use the mortgage valuation to help decide if the property is a suitable security for the loan you’ve applied for.

A valuation and a mortgage lending decision are independent of each other. Once the lender is happy with both, they will usually make you a mortgage offer. 

Mortgage valuations on buy-to-let properties will also include an estimated or potential ‘rental value’ – based on rents being achieved in the area. This helps the lender calculate the lending amount, or LTV ratio, on a buy-to-let mortgage.

What might a lender need from you?

New Home (Structural Defects) Warranty

Sometimes, a lender may ask for a New Home Warranty if the property is under 10 years old, or has been extensively renovated or converted. The warranty is provided by the developer or purchased by the original homeowner. They are designed to provide cover in respect of the cost of carrying out repairs or remedial works arising out of structural defects in new or converted buildings. 

External Wall System (EWS1) form

An EWS1 form is completed by a qualified professional following a fire safety assessment of the building’s external wall system, such as cladding.

The surveyor undertaking the mortgage valuation will identify whether an EWS1 form is required. Usually, the building owner is responsible for obtaining the EWS1 form.

The EWS1 will indicate if the cladding is considered a fire risk. Where a fire risk is identified, HSBC will require evidence that remedial work will be carried out either by developers, or that the remedial work is covered by a recognised government scheme where the leaseholder is entitled to the protections of the legislation governing remediation costs.  If the evidence is already available, an EWS1 form is not required.

What happens if the mortgage valuation is less than the property price?

Sometimes, a property is valued at less than expected. If it affects the amount of money you can borrow, or the rates available to you, this is called a ‘down valuation’. 

The mortgage lender may reduce the amount of money they are willing to lend you. You may also not be able to borrow at the same interest rate. 

In some cases, lenders may let you challenge the outcome of the valuation. At HSBC, you may be able to challenge a valuation amount if the valuation difference is 20% or more, and your mortgage rate or amount is affected. 

How much does a mortgage valuation cost?

Mortgage valuation fees can vary, depending on the type of property.1 Some lenders, including HSBC, may not charge this fee on certain mortgage deals.

What is a home survey?

While a mortgage valuation provides the value of the property for the lender, a home survey would report on the condition of the property.

It’s a very good idea to arrange for a home survey to be done on your behalf when buying a home, to flag any potential problems.

Visit the Royal Institution of Chartered Surveyors (RICS) website to find a surveyor near you

You can choose the type of report you’d like, depending on how much detail you need:

  1. RICS Home Survey – Level 1
    The most basic type of survey describes the condition of the property, identifies any risks and potential legal issues, and highlights any urgent defects.
  2. RICS Home Survey – Level 2
    This is most suitable for conventional properties, which are in reasonable condition. It includes all the features in level one and advice on defects.
  3. RICS Home Survey – Level 3
    The most comprehensive type of survey is suitable for larger, older, or run-down properties.

Buyers in Scotland can also request a free Home Report from the seller – this contains an energy performance certificate, a property survey and questionnaire. 

Depending on the age and condition of the property, some lenders may request that specialist reports are carried out. For example, damp, timber or drain inspections.

Things to keep in mind

You must not rely on a mortgage valuation when buying a property.

A mortgage valuation is based on a limited inspection of the property and, sometimes, only a ‘desktop’ report is carried out with no physical inspection. The report is also for the lender’s mortgage purposes only.

It's a very good idea to get a home survey done on your behalf.

This will report on the condition of the property for you and make you aware of any essential, and potentially costly, repairs that may be required.

Mortgage lenders have their own criteria.

Some properties may not meet your lender’s requirements for a suitable mortgage security. For example, homes made of non-standard materials like pre-fabricated concrete or wood. It may not always be possible to identify if a property construction is outside of the criteria, without a professional valuation report. 

Buildings insurance is a condition of the mortgage.

Buildings insurance can protect you against the cost of repairing or rebuilding your home, should it get damaged by an insured risk. You’ll need to have buildings insurance in place when you exchange contracts, or when remortgaging. But, you can take this out with a provider of your choice.

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