French banks: mortgage lending value, prudent value or market value?

Your institution needs to have a property taken as collateral valued, or to review the value of a portfolio of collateral, and the internal request speaks sometimes of market value, sometimes of mortgage lending value (valeur hypothécaire), sometimes of prudent value. Since 1 January 2025, the European capital requirements regulation has changed the basis expected, and the European valuation standards have followed. This guide puts the three notions in order, states what the report must contain for each, and describes how a portfolio review is organised.

What French law says

The revised CRR regulation. Regulation (EU) No 575/2013, as amended by Regulation (EU) 2024/1623, sets the rules for valuing immovable property taken as collateral. Article 229(1) requires that the value be assessed by a valuer who is independent of the credit decision process, qualified and experienced; that it exclude any expectation of price increases; that it be adjusted to take into account the risk that the current market value is significantly above the value that would be sustainable over the life of the loan; and that it not exceed the market value where that can be determined. Article 4 defines market value (point 76), mortgage lending value (point 74) and the property value within the meaning of article 229 (point 74a).

Monitoring of collateral. Article 208(3) requires a review of the value where information indicates a significant decline relative to the market, and a review by an independent valuer at least every three years for loans above 3 million euros or 5 % of own funds. Environmental and regulatory considerations may be an indication of decline. Statistical models are allowed for monitoring, under conditions (paragraph 3a). An upward adjustment of a value after origination is capped at the average of the last six years for residential property and the last eight for commercial property (article 229(1)(e)).

Professional standards. TEGOVA’s EVS 2025 define market value (EVS 1), the other bases of value (EVS 2), the process and the engagement letter (EVS 4) and the report (EVS 5). Guidance note EVGN 2 deals with valuation for mortgage lending under the prudently conservative criteria. The Charte de l’expertise en évaluation immobilière (the French property valuation charter) describes mortgage lending value (Title III, § 1.15), prudent value (§ 1.16) and valuations for residential credit (Title II, § 8.11).

Residential mortgage credit to consumers. For loans covered by Directive 2014/17/EU, the French Consumer Code requires a valuation in accordance with reliable standards (articles L. 313-20 to L. 313-22), by a valuer independent of the lender, with no relationship of subordination, no family or capital ties and no interest in the property (article R. 313-17), subject to continuing training (article R. 313-19).

What happens in practice

The credit or risk department sends a valuation request. The first question to settle is the framework: collateral for a new loan, periodic review, doubtful debt, loan litigation, lifetime mortgage. The framework determines the basis of value, the date, the level of due diligence and the format of the report. The engagement letter, which EVS 4 requires and which the Charte calls the valuation contract (Title II, § 9.1), sets them out in writing.

For a single property, the mission includes the inspection, the collection of comparables, the analysis of the local market and its cycle, the market value, then the prudent value. For a portfolio, the contract allocates the properties between full valuations with inspection and desktop opinions, according to the size of the exposure, the age of the last inspection and the nature of the property.

The report is kept by the lender for a long time. It may be re-read years later, on a default, a supervisory inspection or a dispute with the borrower or the heirs. The ruling of 19 June 2024 on the lifetime mortgage, discussed in lifetime mortgage: the expert valuation at the heart of the legal issues, recalls that the initial valuation may fall within the scope of the borrower’s consent.

What a valuation report changes

The report names the basis of value and the standard, then presents the values in the following order.

Market value (EVS 1; Charte, Title III, § 1.1): the estimated amount for which the property would exchange on the valuation date between a willing buyer and a willing seller, after proper marketing. It is the reference, and the ceiling for all the others.

Prudent value: starting from the market value, the expert checks that no expectation of price increase is included. In the comparison method, the trend observed between the sales and the valuation date may be taken into account, but it is not extended beyond it. In the income method, the capitalisation rate, rent indexation and renewal assumptions are checked in the same spirit; EVGN 2 suggests limiting future indexation to the lower of the central bank’s inflation target and the current level of the index. The expert then assesses whether the market value appears significantly above what would be sustainable over the term of the loan, which the bank indicates: position in the cycle, excess supply, local demographics, energy renovation obligations. The resulting adjustment is reasoned, not a flat rate.

Mortgage lending value, when requested for covered bonds: a conservative valuation based on the sustainable characteristics of the property, normal conditions of the local market, current use and alternative uses, and a yield acceptable to a prudent owner, excluding speculative or volatile elements (Charte, § 1.15).

The report also states the energy rating and the applicable regulatory deadline (EVS 6), exposure to known natural hazards, and reservations on documents not verified. What it does not do: set the loan-to-value ratio, assess the borrower’s creditworthiness, or guarantee a realisation price.

A worked example

An investment building in RENNES, eight flats, taken as collateral for a fifteen-year loan. Rents net of non-recoverable charges: €60,000 per year. Investment buildings in this area trade at around a 5 % net yield, after three years of yield compression. Market value by capitalisation: €1,200,000, confirmed by comparison.

For the prudent value, the expert adopts future indexation limited to 2 %, a rate of 5.5 % corresponding to the average observed over the cycle, and notes that two flats rated F will have to be renovated before 2028 to remain lettable, at a cost of €45,000 on quotes. Prudent value: 60,000 / 0.055 = €1,090,000, less €45,000, that is €1,045,000, rounded to €1,050,000.

With a loan-to-value ratio of 70 %, the loan calculated on the market value would be €840,000; on the prudent value, €735,000. The difference of €105,000 is what the credit committee needs to see, with the justification for each adjustment.

Common mistakes

• Asking for “a value” without naming the basis. The resulting report cannot be tied to the regulatory framework that made it necessary.
• Applying a flat-rate deduction to the market value by way of prudent value. EVGN 2 calls for an analysis, not a percentage.
• Leaving the term of the loan out of the mission. Without it, the expert cannot assess the sustainability of the value.
• Taking an old value and uprating it with an index. Upward adjustment is regulated, and the Charte treats the updating of a valuation as a mission in its own right (Title II, chapter 5).
• Entrusting the valuation to someone linked to the credit decision. The independence of the valuer is a condition of the validity of the value, under the CRR as under the Consumer Code.

What to gather

• The nature of the transaction, the amount and term of the loan envisaged, and the regulatory framework concerned.
• The title deed, the co-ownership regulations where applicable, current leases and the tenancy schedule.
• Surveys and certificates, including the energy performance certificate (DPE), and the energy audit if there is one; quotes for planned works.
• Property tax notices, service charges, recent minutes of general meetings.
• Earlier valuations and, for a review, the list of properties with the last value adopted and its date.
• For a portfolio: the collateral file, the amount of each exposure and the date of the last inspection.

Timeframe and fee

A valuation of one property with inspection is delivered about three weeks after the inspection. It represents at least 15 hours, that is €975 at the rate of €65 per hour, travel not included, charged at €65 per hour or part hour from PONT-L’ABBÉ. A desktop opinion of value, for portfolio monitoring, represents at least 5 hours, that is €325. A portfolio is the subject of a global quote, with the split between inspections and desktop opinions. A 50 % deposit is requested on signature of the valuation contract. VAT not applicable, article 293 B of the French General Tax Code.

The Market value page describes the report; the Fees page gives the full scale; the Institutions page presents the other regulatory frameworks covered.