When you are applying for a bank loan to buy or build your first home, the bank will require a property valuation as part of the process.
What is a valuation?
A valuation is a formal report, provided by a qualified valuer, on the estimated value of your property.
Banks use a panel of independent valuers to provide valuations. Each lender has a different panel from whom the valuer is appointed. Although the bank instructs the valuer to provide a report, the valuer is an independent professional with specialist training.
A formal property valuation is more rigorous than a market appraisal by an estate agent. It takes into account the following:
A formal property valuation is required before you can be granted a loan. The valuer will take into consideration various factors such as location, number of rooms and the condition of your property. Featured here: Langholm, Newhaven Estate, Tarneit.
Why you need one
When a bank lends you money to build or buy a new home, the property itself is the security for that loan. If you default on your repayments, the bank has the right to sell the property and get back what it is owed.
If the property is worth less than the bank is owed, the loan won’t be repaid in full. And while lenders do have the right to come after you for any shortfall, they know that might not be successful: a borrower who can’t pay their mortgage is unlikely to have any available funds elsewhere.
Accordingly, the bank wants to know what the house would be worth if they needed to sell it. They then use that valuation to calculate your loan to value ratio (LVR).
If you’re borrowing more than 80% of the value of the property, as determined by the bank valuation, you will need to take out lenders’ mortgage insurance (LMI). Learn more about LMI here.
My house hasn’t been built yet, how will the bank value it?
If you are buying a house and land package, the valuer will value the finished property as if it is complete. This is generally termed an On Completion valuation, although some valuers may call it a Tentative On Completion or As If Complete valuation.
Be aware that the valuation will be done as if the property is complete now. That is, the valuer will judge its value in the current selling environment. They cannot take into account any projected rise (or fall) in the property market.
To help them come to an accurate valuation, make sure the valuer:
You can still get an On Completion valuation even if your house hasn’t been built yet, but it’s important to understand that the valuation will be done as if the property is complete now. This means it will not take into consideration any projected rise or fall in the property market.
What happens if the bank valuation is too low?
Most of the time, a bank valuation is a standard step in the loan application process, and the valuation comes back at, or close to, the purchase price. However, if the property is unusual, or you buy in a steeply falling market, you may encounter some issues.
If the valuation is lower than the purchase price, you might have trouble borrowing the amount you want or the bank might require additional security.
Where it can be a real stumbling block is in instances where a borrower only has the minimum 5% deposit available. If the valuation falls short of the purchase price, your deposit might not be enough.
However, it is important to understand there are a few avenues to pursue if this happens. You can:
If you’re bank valuation is too low, don’t despair. There are a few options to pursue if this happens such as obtain a second valuation from a different valuer or a family member to be a guarantor if your goal is to avoid LMI. Featured here: Piermont, Kaduna Park Estate, Officer South.
To smooth the loan application process, make sure the bank has everything it needs to complete the valuation quickly and easily. In the unusual event that there is an issue, knowing early will give you more time to sort it out.
Want to learn more? Check out the Financial Services section of our website or speak to one of our friendly loan specialists on 1300 978 051. Find more information in the finance section of Home Files here.