A popular question mortgage brokers field from clients relates to how banks value a property.
Occasionally, the query includes a tone of anxiety as a lender won’t confirm a loan, despite issuing a pre-approval, until it’s seen the property.
It’s a reasonable approach, as the property will be collateral against their loan, and the lender wants to ensure you’re not paying too much. The valuation can influence your borrowing power, so it’s not a process to be taken for granted.
The lender uses the valuation total as part of a loan-to-value ratio (LVR) calculation. As a general rule, they don’t want to lend more than 80% of the property’s value. This is assuming you have the remaining 20% as a deposit.
If your deposit is short, a lender may offer a larger loan but insist that you take out Lenders Mortgage Insurance, covering them if you default.
Here are the critical factors related to a bank valuation:
Specific purpose
A valuation is for the purpose of issuing a loan and not to be confused with a real estate agent’s market appraisal, which is an estimate of how much someone might pay for the property.
Risk strategy
The lender wants to judge the value of a home to ensure they minimise their risk against issuing a mortgage to you. It’s a prudent action.
Low-ball
A lender’s valuation is almost certainly likely to be lower than a market appraisal. Don’t be concerned, as this would be true for almost every property valuation.
The calculation
A valuer will assess a property’s value based on location, property and land size, the number of bedrooms, structure and condition, council zoning, planning and restrictions, vehicle access (driveways) or garage and the recent sale of similar properties.
This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.