Spike in expensive homes being ‘down-valued’ by banks… just as Rachel Reeves plots a mansion tax

Expensive homes in London and the South East are seeing their values tumble at the same time as the Government plots to clobber owners of pricey properties with a new tax.

Falling property prices mean banks are telling home buyers the home isn’t worth the amount they have agreed to pay for it when they apply for a mortgage, or the value they have stated on a remortgage application.

In some cases they are ‘down-valuing’ properties by as much as 10 per cent, experts say.

When this happens, it can cause sales to fall apart. Even if the sale goes ahead, the buyer may have to put down a bigger deposit or try to renegotiate the price. 

Existing homeowners who are remortgaging may be pushed into a higher loan-to-value band and have to pay a higher interest rate. 

The falls mean more homes could drop under the £2million threshold at which Rachel Reeves is considering a ‘mansion tax,’ according to a report in The Times. 

Target: Rachel Reeves is said to want to levy an extra tax on owners of 2million-plus properties

Paradoxically, speculation about property tax changes in the Budget is one of the reasons house prices are down.  

The Chancellor is said to be planning a council tax revaluation of Band F, G and H homes in England in the Budget. 

With the bands still based on property values from 1991, this could see bills jump for those who live in areas which have seen prices soar.  

Homes worth over £2million would then face an extra levy which could cost them £4,500. 

The Chancellor was said to have initially wanted to set a £1.5million threshold, but decided to move this up to avoid penalising ‘asset-rich, cash poor’ families who don’t have outsized incomes but have benefited from a house price surge. 

It is not clear how the value of the homes would be determined for this purpose. 

While property experts welcomed the reported increase in the threshold, they were concerned it could lead buyers and sellers to be even more cautious, in a market which is already in the doldrums.  

Dominic Agace, chief executive of estate agents Winkworth which has 60 branches in the capital, said: ‘The mooted move will create more uncertainty at the highest end of the property market, due to its predicted escalatory nature, at a time when the market is already under pressure as a result of Budget speculation since the summer.

‘Guidance will need to be provided swiftly on the highest potential tax charge, so everyone can adjust accordingly.’

This could have a knock-on effect on those in more modestly-priced homes, as a slowdown at the top end might prevent people trading up the lower rungs of the property ladder.  

The mansion tax plan may not work as well as expected for the Government, however, if more homes in London and the south east see their value fall and become exempt. 

Property prices have been falling in the capital, with the latest Office for National Statistics figures revealing a 1.8 per cent drop in the year to September. 

Bleak: House prices are down in London, partly because of Budget tax hike speculation 

This means that some mortgage lenders are refusing to hand out mortgages because they don’t feel the house is worth what a buyer has agreed to pay for it, or the value a homeowner has stated when they apply to remortgage. 

In these cases the buyer or homeowner will need to put down more money and perhaps accept higher payments. When buying, it may also mean the purchase no longer stacks up and could fall apart. 

House sale fell apart after £100,000 down-valuation  

Jonathan Alvarez Herrera, mortgage consultant at Ringwood-based broker Ayla Mortgages, told the news agency Newspage: ‘There has been a definite uptick in down valuations in the mortgage market, especially during the past six months of the year.’

He said this was happening more in London and the south east as homes were more expensive, and that some buyers and homeowners were having to contend with cuts of 10 per cent. 

‘It could jeopardise the purchase altogether unless the client is able to put down a larger deposit,’ Herrera added.

‘I recently had a property down valued from £3.1million to £3million. 

‘Although proportionally this was not a large down valuation, the client was not willing to put down an additional £100,000 deposit and could not renegotiate the purchase price so the whole purchase fell through.’

Vijay Rabadiya, director at Borehamwood-based The Mortgage Vine, said that mortgage down valuations spiked in 2023, but ‘still appear regularly where sellers push for higher prices or where local comparables are limited.’

Rabadiya said properties he had seen down-valued saw the banks claim they were two to five per cent cheaper than the price agreed and that ‘new build flats, unique or rural properties, and homes in slower southern markets tend to attract the most scrutiny.’

Others said the system wasn’t fit for purpose and that the valuations produced could feel arbitrary. 

Michelle Lawson, director at Fareham-based financial adviser Lawson Financial, said the whole valuation system needs an overhaul: ‘The valuation system is outdated, inconsistent and highly subjective, often producing drastically different results for the same property depending on the valuer.’

She added that it was hard to challenge a valuation they didn’t agree with. 

‘Challenging valuations is extremely difficult since valuers rarely change their decisions,’ she said. 

‘While avoiding overvaluation is important, the current system lacks transparency and consistency.’

Are you worried about a new mansion tax or in the process of buying a home and having second thoughts? Get in touch: editor@thisismoney.co.uk