Product transfer business remains prolific but one inaccurate valuation could see your once loyal customer head for the door.
Almost 360,000 product transfers took place in the first three months of the year, according to UK Finance’s June Household Finance Review, compared to approximately 120,000 purchase transactions that took place over the same period.
But are lenders maximising their product transfer opportunities and, of equal importance, offering their customers the fairest deal they can?
House Price Index vs AVM
For remortgage business below 75%, and certainly for product transfers, either an Automated Valuation Model (AVM) or House Price Index (HPI) are likely to be used to value the borrower’s home to select the appropriate rate for their LTV.
So does it matter which valuation method the lender chooses?
It’s an unequivocal yes if lenders want to maximise income generated from mortgage lending, treat borrowers fairly, maintain high retention rates and win remortgage business from their rivals.
When comparing the Office for National Statistics’ HPI, the highest performing index in the market, to an automated valuation, the HPI is three to five times more likely to significantly overvalue a property than an AVM.
Risks to revenue and borrower retention
Without the right valuation support, lenders could be losing revenue or loyal customers.
HPIs have traditionally been the method used by lenders to periodically value their portfolios to serve refinancing customers.
But their level of inaccuracy exposes lenders to the risks of overvaluation and undervaluation. Both are damaging in different ways.
By overvaluing a borrower’s home the property is pushed down the loan to value (LTV) bands, turning an 85% LTV customer, for example, into a 75% one instead.
The inaccuracy causes a loss of income, as the borrower’s artificially lower LTV will attract a cheaper rate than should be offered. And the lender is unknowingly carrying higher risk properties than its portfolio valuation results have returned.
Unfair customer outcomes
Undervaluing properties introduces a different set of risks to lenders’ PT and remortgaging business – ones which will drive customers away or result in poor consumer outcomes.
Returning a valuation that’s too low will inflate the LTV and see the borrower wind up with a rate that’s too high for their actual risk profile.
Offering uncompetitive rates to an existing borrower is a sure-fire way to damage your relationship and drive them through the doors of a rival lender that is using a more accurate method of valuation.
If they choose to stay, this puts the lender at odds with Consumer Duty regulations. Undervaluing the borrower’s home produces an unfair outcome where they pay a higher rate for the next two or five years than they would have otherwise been offered if an AVM or survey had taken place.
What’s the alternative to HPI valuations?
Both of these problems can be solved by switching to a reliable valuation model.
The amount of times an AVM can get within 10% of a property’s market value, as confirmed by a surveyor, is around 25 percentage points higher than a HPI valuation.
Using an AVM to value PT business improves outcomes for lenders by preventing an avoidable loss of income.
It also allows lenders to fulfil their responsibilities under Consumer Duty regulations. Borrowers, meanwhile, get the best deal for their circumstances.
PT business is booming. Make sure it gets the right valuation support.
To find out more about using an AVM to value your refinancing business contact Hometrack.