Is your home worth less than you think?
Research from one of the UK’s biggest mortgage lenders has revealed many people seriously overestimate the value of their homes. Laura Starkey explains why this could have disastrous consequences for anyone in need of a new mortgage.
After a decade-long housing boom and over 18 months of sliding prices, it’s no wonder people are confused about what their properties are really worth.
For years, the price of property increased at an unimaginable rate – so much so that the value of the average home increased to seven times the average annual income.
However, since the credit crunch hit there has been endless debate about the depth of the consequent ‘crash’. How far have prices fallen since the start of the credit crunch? And how much lower will they go?
Lies, damned lies and statistics
Often, house price statistics add to the confusion. Take Nationwide’s recent House Prices Index (May 2009), which stated that house prices rose 1.2% in May.
According to the building society, the annual rate of property price decline also slowed significantly, from 15% to 11.3%.
However, this contrasts sharply with the gloomier picture painted by other institutions.
Halifax’s House Prices Index showed property prices fell by 1.7% in April 2009, while the latest data from the Land Registry shows house values fell 0.3% between March and April this year – taking the rate of annual decline to 16.2%.
Vested interests
Right now, most people have an opinion on house prices – and, more often than not, those opinions are informed by vested interests.
Anyone yet to put a foot on the property ladder is likely to be itching for a full-scale housing crash, as lower house prices will make it easier for them to buy.
On the other hand, homeowners – especially those with large mortgages – are probably on the look out for ‘green shoots’.
Optimists might well be disappointed
Unfortunately, an overly optimistic view of the housing market could have serious consequences for some homeowners.
According to research from Abbey Mortgages, on average people overestimate the value of their properties by more than £35,000.
In the east and west Midlands, it seems homeowners are even more overconfident; Abbey’s research shows people in these areas typically inflate the price of their properties by more than £40,000.
People in east and south east England are the worst offenders when it comes to ‘thinking up’ their property values, however. According to Abbey, typical homeowners in this part of the country overestimate the value of their homes by a whopping £53,422!
While it might be nice to believe that your property has retained much of its pre-credit crunch value, in practice this kind of miscalculation could be disastrous.
For example, overestimating the value of the average property* by £35,000 is equivalent to believing it is worth 23% more than its true market value.
This could have significant implications for overconfident borrowers in need of a new mortgage deal.
Don’t get stuck in the SVR trap
In my previous mortgages articles, I’ve written about the danger of getting stuck on your lender’s SVR.
With the Bank of England base rate at its lowest ever level, some mortgage lenders’ standard variable rates (SVRs) seem unusually affordable – so borrowers who would ordinarily have rushed to remortgage at an affordable rate haven’t prioritised finding a new deal.
Whether you delay for ‘tactical’ reasons or through plain disorganisation, letting too much time elapse before you search for a new mortgage could be a big mistake – particularly if you do not have a significant equity stake in your home.
If house prices continue to fall, the equity you have in your home will slowly evaporate. With lenders still demanding big deposits in return for low rates, this could mean you’re eventually frozen out of their top deals.
Of course, this problem will be compounded if you think your property is worth more than it could really sell for. Inflating the value of your home will give you a false impression of how much equity you have in the property – and therefore a false impression of which remortgage deals you may be eligible for.
What’s more, believing you have a larger equity cushion than you actually do could encourage you to sit on your lender’s SVR for too long – only to discover that it’s too late to remortgage later on.
Accuracy is the best policy
Of course, Abbey Mortgages’ research uses averages to make a general statement about homeowners’ tendency to be too optimistic.
It won’t ring true for every person who owns a property. Indeed, it’s likely that many individuals have a very realistic idea of how the economic downturn has affected the value of their home.
However, in my opinion Abbey’s study should serve as a timely reminder that, in the current climate, it is dangerous to make assumptions about how much your home is worth and the options that will be available to you when you need a new mortgage deal.
If you know you will need to remortgage in the near future, it’s a good idea to have your home valued by professionals. This should help dispel any misconceptions you may have, and may help you avoid applying for a mortgage product you won’t be accepted for.
There are also websites that will allow you to check how much properties in your area have recently sold for. A site such as Nethouseprices.com should help you decide whether you’re being realistic about your property’s value.
More than anything, I think Abbey’s report sums up the misguided way many Brits have come to view property prices.
We spend so much time thinking about how much houses will (or won’t) be worth in the future, too many of us have forgotten how important it is to be aware of their real value – financial and otherwise – in the here and now.
* At the time Abbey made its calculations, the average property in the UK was worth £152,895 according to Land Registry figures.
**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**
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