The European Group of Valuers’ Association (TEGoVA) and Association of German Mortgage Banks (2002) and IVSC (2006) citing Council of the European Union, Proposal for Directives of the European Parliament and of the Council, 12890/05 Add. 4, Annex VIII, Section 1.5, paragraph 65, define Mortgage Lending Value to mean the value of the property as determined by a Valuer making a prudent assessment of the future marketability of the property by taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements may not be taken into account in the assessment of the Mortgage Lending Value. The Mortgage Lending Value shall be documented in a transparent and clear manner.
According to RICS (2004) mortgage lending value means the value of the property as determined by a Valuer making a prudent assessment of the future marketability of the property by taking into account the long-term sustainable aspects of the property, the normal and local market conditions, as well as the current use and alternative possible uses of the property. Speculative elements should not be taken into account in the assessment of Mortgage Lending Value. Mortgage Lending Value facilitates the assessment of whether a mortgaged property provides sufficient collateral to secure a loan over a long period.
The purpose of Mortgage Lending Value is to provide a long-term sustainable value, which evaluates the suitability of a property as a security for a mortgage loan independently from future market fluctuations and on a more stable basis. It provides a figure, usually below Market Value and therefore, able to absorb short-term market fluctuations whilst at the same time accurately reflecting the underlying long-term trend in the market.
As indicated by the Royal Institution of Chattered Surveyors (RICS), the Valuer must address the following key issues when determining the Mortgage Lending Value of a property:
- The future marketability and saleability of the property has to be assessed carefully and prudently. The underlying time perspective goes beyond the short-term market and covers a long-term period.
- As a principle, the long-term sustainable aspects of the property such as the quality of the location, construction and allocation of areas must be taken into account.
- As far as the sustainable yield to be applied is concerned, the rental income must be calculated based on past and current long-term market trends. Any uncertain elements of possible future yield increases should not be taken into account.
- The application of capitalisation rates is also based on long-term market trends and excludes all short-term expectations regarding the return on investment.
- The Valuer must apply minimum depreciation rates for administration costs and capitalization of rents.
- If the Mortgage Lending Value is derived using comparison values or depreciated replacement costs, the sustainability of the comparative values needs to be taken into account through the application of appropriate discounts where necessary.
- The Mortgage Lending Value is generally based on the current use of the property. The Mortgage Lending Value shall only be calculated on the basis of a better alternative use, under certain circumstances, i.e. if there is a proven intention to renovate or change the use of the property.
- Further requirements, for example with respect to compliance with national standards, transparency, content and comprehensibility of the valuation, complement the legal framework for the calculation of Mortgage Lending Value.
