The problems in the American sub prime property market, which has caused so much turmoil in the stock markets recently, is starting to affect people looking for a home loan in the UK.
As banks become less willing to lend money, particularly to those with credit problems, we'll discuss how this can make it more difficult to arrange a home loan.
Home loans depend on equity in you house
Home loans are secured against the equity in your house. So for example, if you have a house worth £250,000, but only have a mortgage of £200,000, there is £50,000 of equity in your property.
Lenders would therefore be willing to provide you a secured loan of up to ££50,000 depending on you ability to pay and personal circumstances.
Property values are important
The value of your house determines how much equity you have, when you take your mortgage and other secured loans into account. So the value of your house determines how much you can borrow as a secured loan.
As your equity represents the lenders security, their risks are therefore bound to the value of your house. the greater equity you have, beyond the total secured loans you have, the less the risk to the lender.
But here lies the problem. With lenders becoming less interested in risky loans, following the loan default difficulties in the USA, they are therefore demanding tougher valuations from their surveyors when they value your house during the loan application process.
Lower valuations from surveyors
With surveyors being asked by the lenders to err on the side of caution with their valuations, many people are finding that the value of their house is less than they thought when applying for a home loan.
Lower valuations reduces the equity in your house, meaning that the lender will reduce the amount that they are prepared to loan to you. Your ability to borrow is reduced.
What can you do about it?
If you want to borrow a large amount, but a surveyor has valued your property lower than expected, then you can always ask another surveyor to conduct another valuation – at your cost. Or you could find another lender.
You might find a problem with this though, as the lenders rely on a limited panel of surveyors. Another lender will probably use the same surveyors so you are no better off.
You could also appeal to the surveyors and provide evidence, obtained from an estate agent, of recent house sales in the area and for similar properties, to support your claim.
With houses being individual in their standard of maintenance and features, you might well find the surveyor stands by their initial valuation, and that is what the lender will take into consideration.
Mortgages, loans and remortgages could be affected
Although downgrading property valuations doesn't appear to be affecting the whole of the UK at the moment, many areas that have seen high growth in house prices and that are now cooling, are coming under greater scrutiny by banks and build societies.
Any type form of borrowing that relies on equity in your house, such as mortgages, secured loans and remortgages, may be affected by this clamp down.
Although it probably won't affect people wanting small loan amounts, if you are seeking a larger loan, you should be prepared to receive a shock when your property is valued as it may be 5 to 10 percent lower than you expected.