When you undergo a home loan application or the refinancing process in Australia, you can expect to have a bank valuation of your property.
Banks love to limit their financial risk, and that’s what a bank property valuation is all about. Your lender of choice will want to know if the cost of your mortgage can be recovered by the timely sale of your property...if it gets to that state.
But what does this mean for you, the borrower? In this article, we’ll explain:
- How bank and lender property valuations can affect you and your home loan application.
- What is involved in bank and lender property valuations, and the different methods used.
- The difference between market value and property valuations for lending purposes.
- What you can do if lender property valuations are low.
If you’re in the market for a new home or are looking to refinance, this article can give you all the background on property valuations. So you can progress through the home loan application process with added confidence.
How Bank And Lender Property Valuations Can Affect You
As part of the home loan application process, you’ll get a property valuation from your bank or lender. You see, banks and lenders like to avoid risky business as much as possible. And a property valuation provides them with data to help assess the risk involved in approving your home loan application.
Undertaking a property valuation allows banks to ensure they aren’t allowing you to borrow a larger amount than the value of the property.
This is important for lenders because your home acts as collateral for your home loan. If for some reason there is a forced sale of your property to recoup costs, your lender wants to know if the sale of your home can cover your mortgage.
But how does the property valuation process affect you as a home buyer or if you’re looking to refinance?
Banks and lenders use the value of the property to inform the outcome of your home loan application. It will influence your borrowing power. Property valuations are used to calculate the loan to value ratio (LVR) percentage, by dividing the home loan amount by the valuation amount.
If you have a higher LVR, your bank may apply a higher interest rate to your home loan. This is to offset the risk to them. Having a higher LVR is also riskier for you, and can impact your financial situation.
The property’s value will also be taken into account in deciding if you are required to pay lenders mortgage insurance (LMI). Usually, banks require a 20% deposit, which then leaves 80% LVR. If the LVR is higher than 80%, you will most likely incur LMI.
LMI adds a layer of security to the bank or lender when providing a loan that they view as being risky.
All this can be a tad confusing. Especially if you’re new to the property market. But a good mortgage broker, like YouBroker, can explain the valuation process and help you to qualify for a loan that’s suitable for your financial situation and your goals.
What Is Involved In A Bank and Lender Property Valuation?
When a bank undertakes a property valuation, they’ll usually employ an independent valuer or valuation firm to perform the task. Banks and lenders want to know how much they can expect to receive for the timely sale of your property to recoup their costs.
In addition to market conditions... The characteristics of your property taken into consideration during a valuation include but are not restricted to the following:
- The number of bedrooms.
- The property and land size.
- Its location.
- Council zoning, planning, and any related restrictions.
- The condition of the property and its structure.
- Fixtures and fittings.
- Recent sales in similar locations.
- Garages, carports, vehicle access, and driveways.
Banks and lenders use three main methods to ascertain the value of a property. They are:
Full Valuation
As indicated in the name, this is a full, comprehensive valuation. It involves a thorough on-site inspection.
The valuer will undertake an internal and external inspection of the property. They’ll then provide a detailed report for the bank which includes photos, building condition reports, the age of the property, council zoning information, and market conditions.
A full valuation is usually performed when the risk to the bank or lender is considered to be high. They want detailed data in order to make the right decision that mitigates risk.
If the area in which the borrower wants to purchase has seen rising house prices which may not be sustainable, the lender may opt for a full valuation. It’s also common for many non-bank lenders and smaller loan providers to perform full valuations.
Kerbside Valuation
This involves the valuer undertaking an external inspection of the property. The results of this inspection are combined with other data, such as relevant recent sales.
As an internal inspection is not performed during a kerbside valuation, any significant or added features located inside the property, such as recent renovations, will not be taken into account.
Desktop Valuation
This method doesn’t involve a valuer performing a physical inspection of the property in question. This valuation is based upon comparable sales data from national databases and properties close by.
This type of valuation is common amongst the major banks. It’s also more common for loans with a smaller LVR, as the risk profile is lower.
Bank Valuations And Market Value - What Is The Difference?
An important nugget of info to know is that a bank property valuations will differ from the sale price, market valuations, or valuations provided by your real estate agent.
The market value of your property gives you an indication of how much you could expect for the sale of your home in the current real estate market. It’s expected that you’d want the best price possible for your property, and are prepared to wait or undertake property maintenance or fixes to get it.
A property valuation for your bank or lender is designed to give them data on the expected security your property will hold against the home loan. Banks and lenders also use this information to determine your borrowing power and the risks involved in providing the loan.
As you can expect and much to the chagrin of many a home loan applicant... Bank valuations are usually lower than the market value of your property. Why you may ask?
Well, property valuations for banks and lenders are conservative in their estimates. They’re only interested in the repossession of the property and the ultra-quick sale to recover costs of the loan, should the borrower default on repayments. The property is not being assessed for its value as a home or investment when it comes to property valuations for lending purposes.
What is also taken into consideration is recovering the cost involved in selling the property, such as legal, advertising, and real estate agent fees. And thus, estimates will most likely be on the lower side to accommodate these costs.
What If The Bank Property Valuation Is Low?
A low bank or lender property valuation can have a detrimental effect on your home loan application. As mentioned earlier, it can affect how much you can borrow, the interest rate offered by your bank, and if you are required to pay LMI.
A low property valuation could mean you’ll need to drum up extra funds to make up the shortfall. Or, it could mean your home loan application is rejected entirely.
If you believe the property valuation is far too low, you do have options.
Ask your bank or lender for another valuation to be performed by a different provider.
Banks and lenders usually have a pool of independent valuers and firms that they use. You could request to have a different valuer undertake a property valuation. You may end up with a different and more favourable amount.
Lodge a dispute with your bank or lender against the property valuation.
Don’t agree with the bank’s valuation amount? If you’ve done your homework and amassed comparable sales data for similar properties in the same or neighbouring locations, you can provide this to back a dispute. However, note that valuers rarely change their valuation results, even with the provision of the above data.
And if the above inquiries don’t change the property valuation amount, you may need to make up the shortfall by:
- Arranging for someone to act as a guarantor.
- Look at leveraging any existing equity.
- Holding off and saving more money to build up your deposit.
- Borrowing funds from family or friends.
If you’re having trouble with the valuation process and have been knocked back for a home loan, you may consider employing the services of a qualified mortgage broker.
YouBroker can assist you by providing advice and guidance throughout the whole real estate purchasing and refinancing process, including property valuations.
Conclusion
Your property’s market value when compared with property valuations for lending purposes will rarely come close to matching up. And while that can suck, there are reasons why these valuations are different.
While you’re looking at your property as a beloved home or an investment...Banks and lenders are looking at it as a security deposit to recover funds should you default on the loan.
But a low property valuation by your lender of choice can have a detrimental effect on your home loan and financial situation. It can even cause an outright rejection of your application. And you can be saddled with a high LVR and high interest rates.
That’s why it’s important to be informed on the valuation process, and know what you can do should the resulting valuation be too low.
And if you need a helping hand through the process, YouBroker can provide you with expert advice and information to make the entire process easier... All easily accessible from your computer or smartphone, at your convenience.
Are You Looking For An Online Mortgage Broker?
Property valuations, financial jargon, and seemingly endless home loan application processes can feel confusing and daunting. Wading through the application criteria and all it entails can be stressful. But YouBroker can help.
With an Australian Financial Services Licence (AFSL), and Mortgage and Finance Association of Australia membership, YouBroker is a name you can trust. We have the industry experience and qualifications to assist people with different needs and financial situations to successfully land a mortgage.
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We can help you figure out:
- Your borrowing power, including factors such as DTI and Assessment Rates at each home loan lender.
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Let YouBroker provide you with the information and support to make your refinancing, investment property, or new home dream a reality with confidence and ease.
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