AVM’s: Who do they benefit - lender / broker / consumer?

Julia Harris, mortgage analyst at moneyfacts.co.uk investigates the use of AVM's and looks at whether it’s the lender, broker or consumer who benefits from their use?

“With competition in the mortgage market increasingly intense, lenders are fighting a continual battle to keep their products competitive and appealing to both the intermediary and consumer. Profit margins have been squeezed on many products; causing lenders to focus on alternative benefits in a bid to attract new business.

“Lenders are not only competing on price but in addition are now playing the ‘speed of service’ card to actively promote their products. The latest tools being used to woo potential clients are Automated Valuation Models (AVM's) which are now becoming a key part of the mortgage package for many existing and new lenders.

“The use of AVM's can give the lender an almost instant property valuation, with most systems requiring only basic property details and the postal code. Traditionally lenders have used AVM's for low loan to value (LTV) applications i.e. lower risk mortgages, often in preference to a manager’s valuation and to save the cost of a compulsory professional valuation.

“The difference today is that some lenders are using AVM's as a substitute to professional valuations on all mortgage applications, including those with high LTV ratios. But who really benefits from this?

“The obvious advantage of an AVM to the consumer is that it is quick and does not require a site visit, which can sometimes be inconvenient. However, it must be remembered, this type of valuation is for the benefit of the lender –providing an indicative valuation to ensure a property is suitable to mortgage and priced in line with the current market value.

“However, it provides no reference to the condition or state of repair of the property or the possible variations between the individual properties within that postal code, i.e. a smaller or larger than average garden, a corner plot or a specific feature that could influence the ‘standard’ valuation figure for the area in question.

“The use of AVM's can be sold to the consumer as an additional service, should they wish their mortgage to complete in the shortest possible time. But how many cases in reality truly need to complete within a few days? Consumers could not be blamed for feeling a little cheated when they are paying on average around £200 for a few minutes work inputting to a computer program.

“For intermediaries, AVM's offer a fast service at no additional cost, so thereby speeding up the mortgage application. Offering a fast and efficient service to their client which also brings their commission in that little bit earlier.

“Once the systems are established within the lenders application process, it can become cost effective and of course provide a much simpler process to obtaining property valuations by eliminating the need for a third party – the valuer.

“With more and more lenders adopting AVM's, and extending their use within their mortgage criteria, it seems they are here to stay. With a rising housing market, lenders are comfortable using this automated system, and brokers are of course keen to see their mortgage business completed in the timeliest manner to receive their income.

“The only real dangers seem to lie with the consumer. They need to be fully aware of what they are paying for, given the options of alternatives, encouraged to also obtain a professional valuation when necessary, and not advised to choose specific lenders purely based upon the application completion time. In many cases even with standard valuations and application times, the mortgage is still the most efficient element of a property transaction.  

“If the housing market begins to destabilise it will be interesting to watch whether AVM's are so actively encouraged by lenders or used to value properties at such high LTV's. When their security becomes at risk – I suspect they may adopt a more cautious approach.”

NOTES TO EDITORS:

Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry. 

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