The difference between a mortgage valuation and a sales valuation

Your home can have several values at the same time, and that is not a mistake. Nor is it a typo by the authorities or an estate agent who has got the sums wrong. There are three different figures, each with its own purpose: the mortgage valuation (realkreditvurdering), the sales valuation (salgsvurdering) and the official property valuation (offentlig ejendomsvurdering). The first two are the figures you as a homeowner most often come across when you borrow or sell, and they are what this article is about.

The difference between a mortgage valuation and a sales valuation comes down to what the figures are used for. The mortgage lender uses its valuation to set the lending value (belåningsværdi), that is, the value that determines how much can be borrowed against the home. The sales valuation is the estate agent’s estimate of what the home can realistically sell for right now. One figure shows how much you can borrow against the home; the other shows what you can expect to get for it if it goes on the market.

The two figures can easily differ, because they serve different purposes. The mortgage valuation is based on a cautious estimate of the value, while the sales valuation starts from current market conditions. That is why the mortgage lender’s figure is typically the lower of the two. Once you know the difference, it becomes easier to use the figures correctly, both when you take out a loan and when you assess what the home could fetch in a sale.

What is a mortgage valuation?

A mortgage valuation is the valuation that the mortgage lender itself, or one of its partners, carries out when you want to borrow money against your home. Its purpose is to set the lending value, that is, the value the lender uses to decide how large a share of the property’s value can be financed with a mortgage loan (realkreditlån). You may also come across the term belåningsvurdering (lending valuation) for the same figure, because the valuation is all about lending.

The valuation is not a reflection of today’s selling price or of the price you paid for the home. It is based on a cautious estimate of what the property, given its character and current market conditions, is judged able to sell for in a normal sale within a reasonable period. The lender must be able to stand behind the figure for the entire term of the loan, so it does not count on a price that only holds during a short period of unusual activity in the market.

Who is behind the valuation?

The mortgage lender typically sends a valuer from the lender, or an estate agent from a partner agency, out to look at the home. Among other things, that person looks at the size of the house, its location, the condition of the home and its energy label, as well as comparable sales in the area. Information about building permits, the general market trend and the price level of similar properties may also be taken into account.

The valuation results in a report that documents the property’s value and forms the basis for how much the lender can lend against the home. The report is the lender’s internal working document, and the lender is not obliged to hand it over. So you should not expect to see the full basis for the valuation, but you can ask to be told what value the lender has arrived at.

Lending limits for mortgage loans

How much can be borrowed through a mortgage loan is not something the lender can decide freely. The lending limits are laid down in the Danish Mortgage Credit Loans and Mortgage Credit Bonds Act (lov om realkreditlån og realkreditobligationer m.v.). For the types of home you are most likely to come across as a private individual, the limits look like this:

• Owner-occupied homes for year-round use can be mortgaged for up to 80% of the property’s value.

• Holiday homes that are not let out commercially can be mortgaged for up to 75% under the same Act.

• Properties with private cooperative housing (andelsboliger) can also be mortgaged for up to 80% of the property’s value under the same Act. The loan is taken out by the housing cooperative against the cooperative’s property, not by the individual member.

These percentages are the upper limits set by law, not a personal approval. The actual loan may be lower even if there is room within the lending limit, and whether you can get the loan also depends on a separate credit assessment of you as a borrower.

You can ask the mortgage lender to tell you your own figure. It is the value the lender has set for your particular property, and it is the one to work from when you calculate how much can be financed.

What is a sales valuation?

A sales valuation is the estate agent’s estimate of what your home can realistically sell for right now. It is based on comparable sales in the area, the home’s condition and location, and the current supply of homes for sale. It is not a figure meant to hold for years, but a snapshot of the market as it looks when you are thinking of selling.

When you book a sales valuation with an estate agent, the agent comes out to look at the home. Factors such as the type of home, any renovations, its size and the plot are taken into account. The agent also draws on the official property valuation and on previous selling prices in the area, and the popularity of the neighbourhood and the supply of homes play a part in the valuation too.

You book a sales valuation yourself, and it is not the same as the valuation the mortgage lender has carried out for the loan. Both may be done by an estate agent, but they are commissioned by different parties for different purposes, which is why the figures can differ.

The official property valuation is a third figure

In addition to the mortgage valuation and the sales valuation, there is a third value: the official property valuation. It is set by the Danish Valuation Agency (Vurderingsstyrelsen) and has a completely different purpose from the other two. The figure is used as the basis for property value tax and land tax, and it is based partly on information in BBR (the Danish building register).

So the official property valuation is not the value the mortgage lender lends against, nor is it a selling price. You should therefore not confuse it with the two figures that actually determine how much you can borrow and what the home can fetch. You can read more about how the official property valuation is set on Vurderingsportalen (the Danish property valuation portal).

Where can you find the figures, and why is the lender’s figure often lower?

• You get your sales valuation from the estate agent who came out to look at your home.

• You can ask the mortgage lender to tell you the mortgage valuation.

• You can find the official property valuation at vurderingsportalen.dk.

The fact that the mortgage lender’s figure is typically below the estate agent’s does not mean that either party is wrong. It is about what the figure has to withstand. The lender lends you money with the home as security. If one day you cannot pay and the home ends up at a forced auction, the sale must be able to cover the loan. That is why the valuation is based on a principle of prudence.

That principle explains why the mortgage valuation is often lower than the sales valuation. A sales valuation describes what the home can fetch in a normal sale right now, while the mortgage valuation has to hold for the entire term of the loan. The lender cannot count on a price that only applies during a short period of unusual market activity. Instead, it sets the value cautiously, which is why the valuation can end up below the expected selling price.

Nor does a single high price necessarily raise the valuation. If a particularly eager buyer has driven the price up, that is down to that one buyer’s interest and not to the home’s general price level. Something like that should not lift the valuation, which is why the lender’s figure becomes the lending value to which the percentage limit is then applied.

What a lower valuation means for your loan

The lending value is the property value the mortgage lender uses as the basis for its calculations, and it is not the same as the market price. When the lending value is below the selling price, your loan-to-value ratio rises, because the loan now makes up a larger share of the value being used in the calculation. The loan-to-value ratio is the relationship between your current borrowing and the value it is compared with, and it changes when either the debt or the value moves.

A higher loan-to-value ratio can be felt in your finances. A low valuation increases the relative loan-to-value ratio, and that can trigger higher contribution rates (bidragssatser), especially if the loan exceeds 60% of the value. Exactly where the threshold lies and how the rates are structured depend on the individual lender, so these are figures you need to find in your own loan offer or ask the lender about.

If the home is valued lower than the price you paid for it, this also affects how much you have to put in yourself. The difference has to be covered some other way, either from your own savings or with an additional bank loan. This is because, for an owner-occupied home for year-round use, the mortgage loan can be no more than 80% of the value the lender has set. In addition, under the rules of good practice for home credit (god skik for boligkredit), you are, as a rule, required to pay a reasonable down payment yourself, which is normally 5% of the purchase price.

Mortgage valuation when refinancing a loan

With a top-up loan, the lender carries out a new valuation of the home to work out how large a loan it can offer. This can also happen when you refinance, for example if you increase the loan at the same time. That valuation is often slightly lower than a valuation made in connection with a sale, and the explanation is the same as before: the purpose is lending, not selling. The lender assesses what the home is worth as security for a loan over its entire term, not just what it could fetch in a sale right now.

The official property valuation can play a part when you refinance, but it is not the only factor the lender takes into account. Lenders give weight to their own valuation, and they are not obliged to use the authorities’ figure as the starting point for lending. The law requires the mortgage lender to value the property itself, and it is that valuation the percentage limits are calculated from.

How to give the lender the right basis for its valuation

First and foremost, you can make sure the lender has had the right information to base its valuation on. The valuation is based on the information available, and if documentation of the home’s condition and improvements is missing, that can affect the result.

• Collect receipts and invoices for renovations so you can document improvements such as a new roof, a new kitchen, a new bathroom or energy upgrades.

• Make sure extensions and alterations are correctly registered in BBR, because the valuer works from the information in BBR.

• Provide a recent energy label, as the energy label is part of the valuation and can document the home’s condition and efficiency.

• Ask the mortgage lender for a written explanation of the valuation. The Danish Financial Complaint Board (Det Finansielle Ankenævn), which handles complaints about mortgage lenders, generally cannot review the valuation itself, but the explanation can show which matters could be better documented.

The point of all four steps is the same: you cannot order a higher figure, but you can make it easier for the lender to see what the home actually offers. If, for example, you have had a new roof put on or renovated the bathroom, these are improvements that might otherwise be overlooked. With receipts and invoices, something you have only mentioned becomes something the lender can rely on.

The same goes for BBR. If you have built an extension or made alterations that are not registered, they will not appear in the information the valuer works from. Checking the registration can therefore be what explains why the figure lands where it does. An updated energy label is part of the same picture, because it documents the home’s condition and efficiency rather than leaving it to an estimate.

Finally, the explanation may be the real key. It shows which factors the lender has given weight to, and therefore also where documentation may be missing. Once you have gathered the material and received a written explanation, you are on firmer ground if you want the valuation reconsidered.

What does the difference mean for borrowing and selling?

To keep track of the mortgage valuation and the sales valuation, you first and foremost need to know what each figure is used for. In short, you are dealing with two different values, each with its own purpose and its own time horizon.

• The mortgage valuation sets the lending value for the mortgage lender and is typically lower, because it has to hold over time and protect the lender against losses.

• The sales valuation is the estate agent’s estimate of a current selling price based on the market as it looks right now, using comparable sales, condition, location and supply as its basis.

• The official property valuation is a third figure, used for property taxes, and should not be confused with the other two.

When the figures differ, it is not a mistake but a natural consequence of their different purposes and time horizons. The mortgage valuation indicates how much you can borrow against the home, the sales valuation indicates what the home can fetch, and the official valuation is concerned with tax. Once you know the difference, you are equipped both to read the loan offer and to judge what the home can realistically sell for.