- Property valuations are a standard part of the home loan application process
- They are generally conducted on behalf of the lender although the cost may be passed onto the buyer as part of their application fees
- It is common for there to be a difference between a formal property valuation and market value
When it comes to property valuations, it pays to remember there are:
- official valuations conducted by formally trained and accredited property valuers, and
- property appraisals that may be offered by real estate agents
The two are likely to arrive at quite different values for the same property and neither may match what someone is willing to pay for it.
Let’s check what an official property valuation entails, how to get one, and why they’re needed.
Lender valuation
As you've likely guessed, a lender valuation is one carried out on behalf of a lender that's received an application for a home loan. A lender valuation sets the price a bank or non-bank lender will use to determine whether the property acts as sufficient security for the loan amount.
As such, a formal property valuation is part of the loan application process. It will consider things like the land, the condition of the dwelling itself, the neighbourhood, access to amenities, demand for the area, and many other factors.
However, what the valuation comes in at and what you pay for a property are unlikely to be the same. Typically, lender valuations tend to be considerably lower than market prices.
This is because licensed valuers are trained to be objective, inherently conservative, and only consider the condition of the property at the time they value it, not how valuable it might be in the future as potential buyers tend to see it.
Why do lenders need valuations?
Lenders use formal valuations to assess the risk of lending to prospective buyers. They are particularly important in calculating loan-to-value ratios (LVRs). A loan-to-value ratio is the value of a property compared to the amount of money being borrowed for it through a home loan.
LVR is calculated as a percentage and is used by lenders to assess the risk of accepting your loan application. The lower the LVR, the lower the risk that loan is likely to pose to a potential lender.
Keeping track of your LVR when house hunting is important as it gives you some indication of your borrowing power. A low LVR can also help you avoid certain home loan fees, particularly Lenders Mortgage Insurance (LMI), and also give you access to a more competitive interest rate. Most lenders will not charge LMI on loans with an LVR of 80% or less - a 20% deposit - though some lenders may offer no-LMI loans to borrowers who have a 15% deposit.
How much is a lender valuation?
When you purchase a home, banks and non-bank lenders will conduct their own valuation on a property. Many lenders will pass on the cost in their fees - generally somewhere between $300-$600 - while others may waive the cost as an enticement to add you to their lending book.
You can check the cost for your lender’s valuation by looking at the breakdown of the establishment fees of the home loan you are applying for.
See also: Guide to home loan fees and charges
How do property valuations differ from market appraisals?
Property valuations provide a legal value arrived at by a trained and licensed valuer after they have closely inspected the property according to a formal process. They cost money and are considered an official measure of a property’s worth.
Market appraisals can give you an indication of price based on the opinion of real estate agents from their knowledge of the area, similar properties, and recent sales. They are usually free but may come with inherent bias based on the motivations of an agent. Market appraisals have no legal standing.
Other types of valuations include those you may see on real estate websites. They are often generated by algorithms that assess the property’s value based on the site’s data, including:
- recent sales in the area
- the address
- general property description
The types of valuations offer a ballpark estimation that will likely bear little correlation to an official valuation.
What if the lender valuation and purchase price aren't the same?
It’s not unusual for a lender to value the property at a considerably lower price than what the house is selling for. This is called a valuation shortfall, and it essentially means your lender may not be willing to lend you the money you originally applied for.
In effect, it can mean you may need to:
- come up with more of your own money
- pay more in lenders' mortgage insurance
- keep shopping around for another home
- approach another lender
That said, your loan application could still get approved but if the shortfall pushes your LVR higher than 80%, you’ll likely need to pay LMI.
Example
If the purchase price is $600,000 and you’ve applied for a $420,000 loan, the loan-to-value ratio comes in at 70%. But if the lender values the home at $500,000, the new LVR is 84%, pushing your purchase above the threshold for avoiding LMI.
See also: How much is your home worth?
Savings.com.au’s two cents
Be prepared for an official valuation to come in lower than the price you may have offered. Formal valuations take into account many factors and can be notoriously conservative.
It is quite common for there to be a gap between a formal valuation and market value but if the shortfall is substantial, it can give you an opportunity to reassess whether the home may come with some basic flaws you might have overlooked. Purchase prices sometimes reflect an 'emotional premium'.
Buyers can sometimes challenge a valuation if they can provide evidence of recent, comparable sales to the lender. But it may also mean applying to another lender where the valuation may be more favourable.
Where to find a more competitive home loan
If you're buying a home or looking to refinance, the table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
What influences a home’s value?
Here are the key factors that professional property valuers consider:
Land value
This takes into account the size of the block of land, local council zoning, any planning or environmental restrictions, ease of access, geographical topography, its aspect, and general layout.
Location
Location is a key denominator in any property equation. A house and land, close to a capital city, with access to public transport, good schools, and amenities like cafes and restaurants, will likely be worth more than the same size house and land in a remote town.
If you are looking at buying, researching the suburb is the best way to understand the value of homes there. A desirable location - for example, one with a view or close to water - will make a property more valuable than a comparable home in the same locale without those attributes.
Demand
Australia’s population growth has been a key driver of property prices in many parts of the country. In economic terms, supply and demand will always influence the value of an asset, and property is no different.
As an example, during the pandemic, many coastal towns saw property values skyrocket as people sought to leave capital cities for seachange destinations. The price spike was driven by the low supply of properties coming onto the market while many potential buyers were looking to buy.
Conversely, if there is a lack of buyer demand in an area or too many homes on the market, property values may remain stagnant or decrease.
Property condition
The physical structure of a property is also key to its value. A valuer will assess its age, the materials it is made from, its state of repair, and the standard of its fixtures and fittings. The same goes for features like pools, gardens, decks, or fences.
Size and layout
The number and types of rooms will have a bearing on an official valuation. A valuer will consider a property’s layout and architectural style as well as the number of bedrooms, bathrooms, and living spaces.
How to increase your property’s value?
If you’re a seller, there’s not too much you can do about the land and the location of your property. However, there are a number of things you can do to your home to boost its value and some of them are not that difficult. They include:
adding a bedroom, bathroom, or additional living space, including a granny flat
adding an outdoor area such as a deck or patio area that provides additional living space and is cheaper than adding a room
upgrade fixtures and fittings
basic repairs and maintenance, and cosmetic changes such as a paintjob
tidy the gardens
make it neat and presentable