Valuations; What are they and what happens if your valuation is lower than expected?

A lot of my clients get confused about valuations, so I thought I'd address the issue on the site. Hopefully this helps some of you!

Whether a bank will grant you a mortgage is decided not only on what you can afford to repay, but on the valuation of the property you want a loan for. For example, if your property is valued at $500,000, and you ask for a $400,000 mortgage, a bank will probably help you out as you're borrowing 80% of the value of the property (this is the LVR).

Valuations are generally the same as what you bought your house for, especially if you bought it at auction and you haven't owned it long. There are cases where the bank is satisfied no risk exists, use their own internal valuing system instead, or use the estimated value you provided when initially applying for the loan.

Valuations or ‘vals’ as they’re referred to in the industry can assist you in realising your dreams whether they be home ownership, a renovation or holiday or act to create an added hurdle.

When applying for a home loan, the Banks generally select the valuation company and order the valuation. “Valuers” generally earn between $200-300 a job. Each job involves a meeting with the loan applicant, viewing and measuring the property, comparing their valuation with 2-3 comparable sales and writing up a report. Much emphasis is placed on comparing your property with like properties in the area.

The effects of a valuation differ depending on why you're having it done.

Refinancing

When refinancing a loan, many express concern over what will happen if their new valuation comes in lower than expected. Although not preferable, the good news is most, if not all the major banks provide you with a number of options.

1. If unhappy with a valuation, you have the right to withdraw a loan application. Often, there’s no fee attached, however, some smaller lenders will charge an application or valuation fee upfront.  To avoid this from happening, check the conditions prior you going ahead.  
2. Resubmit your loan with another bank and request an alternate valuer. However, for the health of your credit record I wouldn't do this an exorbitant number of times.
3. Argue the valuation. This isn’t always successful, but in some cases, the valuer may increase the valuation by 5 or 10,000 dollars or even agree with your expectations.

Purchase
Most of the time, the valuer simply uses the price quoted in the contract of sale, i.e. the price you bought the property. In some circumstances, the valuation can come in lower than expected.  If so, its better the bank and valuer bring this to your attention prior to finalising the purchase. If there is a mismatch between yours and the bank's expectations, you could be up for significant additional costs, such as LMI and might even have your loan decline if you are deemed to be borrowing too much.

Feel free to leave a comment below if you have any queries, or give us a call and get in touch.