Understanding bank valuations
Purchasing a property requires understanding how bank valuations work—a critical step in securing your home loan. As a first-time homebuyer, it's important to grasp how bank valuations affect your borrowing capacity and loan terms. Working with an experienced Ryde mortgage broker, Parramatta mortgage broker, or specialist in your area ensures you navigate this process confidently. At Buyvest, we aim to guide you through the intricacies of property financing and ensure you're prepared every step of the way across Gladesville, Baulkham Hills, Castle Hill, and throughout NSW.
Quick overview: A bank valuation determines the security value of a property for lending purposes. Valuations affect your borrowing capacity, deposit requirements, and whether you'll need Lenders Mortgage Insurance. Understanding the different valuation methods helps you make informed decisions and avoid surprises during your property purchase.
What is a bank valuation and why does it matter?
Key principle: A bank valuation is an essential part of securing a property loan. Understanding how it works helps you make informed decisions and avoid surprises.
A bank valuation matters because it tells the lender how much your property is worth. This helps them decide how much they're willing to lend you—whether you're buying a home, refinancing, or using your equity. It's how the bank checks the risk before approving your loan.
What a bank valuation involves
A bank valuation is an independent, professional assessment of a property's value. It's primarily used by financial institutions to determine the property's worth for lending purposes. The purpose is to determine the security value of a property for mortgage lending. The approach is typically more conservative, focusing on risk management and quick-sale scenarios rather than long-term market conditions. The valuation is conducted for the bank's benefit, not the buyer's. The outcome directly influences your loan-to-value ratio (LVR), which impacts your borrowing capacity.
In contrast to market appraisals that you might receive from real estate agents, bank valuations tend to be more cautious. Often, they come in below the purchase price or market value because banks need a buffer in case they must repossess and sell the property quickly.
How bank valuations affect your property purchase
A bank valuation affects several important aspects of your property purchase:
- Loan amount: The maximum loan amount is determined based on the bank's valuation, not the purchase price.
- Deposit requirements: A lower valuation may require a larger deposit from you.
- Lenders Mortgage Insurance (LMI): If the bank valuation is lower than the purchase price, you may be required to pay Lenders Mortgage Insurance.
- Loan approval: A significant difference between the purchase price and the valuation could put your loan approval at risk.
- Negotiation leverage: Understanding the valuation process gives you negotiating power, especially in pre-purchase valuations.
- Finance clause protection: A lower valuation could justify withdrawing from a contract if finance falls through.
By understanding these factors, you can better prepare for any potential challenges and plan your finances accordingly. At Buyvest, we guide you through these decisions to make sure you're in the best position possible to succeed.
Bank valuation versus market valuation
Critical distinction: One of the most important aspects of bank valuations is the "valuation gap"—the difference between the bank's valuation and the market value or purchase price.
Banks use more conservative valuations to protect their investment, considering quick-sale scenarios. The bank valuation will reflect potential downturns in the market, which may not always align with current market trends. In volatile markets or for unique properties, the gap between market value and bank valuation can be larger. The gap between the two values can vary based on location, property type, and market conditions.
As a property buyer, especially in competitive markets, it's important to anticipate this gap and plan accordingly. If the bank's valuation comes in lower than the agreed purchase price, you may need to cover the difference with additional funds. At Buyvest, we're here to help you navigate these potential valuation gaps and ensure that your financial strategy aligns with the realities of the property market.
Three main valuation methods
Understanding methods: When purchasing property, it's important to understand the various valuation methods banks use to assess property value. These methods directly impact your loan approval, borrowing capacity, and deposit requirements.
Automated valuation models (AVM)
Automated Valuation Models (AVMs) provide a quick and cost-effective way for banks to assess property values. Whilst they are highly efficient, they come with some limitations.
AVMs rely on algorithms that analyse historical sales data, property attributes, and market trends. The system pulls data from recent property settlements, median sale prices, and the bank's own internal database. Results are typically available almost instantly, and AVMs are the most affordable option for banks, often free. AVMs are reliable for standard properties in areas with strong sales activity and comparable property data.
However, AVMs cannot account for the condition of the property, recent renovations, or unique features that might affect the value. AVMs are commonly used for lower-risk loans, refinancing, or as preliminary assessments. At Buyvest, we can help you understand how an AVM could apply to your property purchase and what it means for your financing options.
Desktop valuations
Desktop valuations offer a more personalised approach compared to AVMs, providing a detailed assessment based on available data. This type of valuation is carried out remotely by a qualified valuer without an in-person inspection. The valuer relies on property listings, photos, floor plans, and comparable sales data. Typically, desktop valuations are completed within 1–3 business days and generally cost between $100 and $220.
Whilst more nuanced than AVMs, desktop valuations can still miss out on details regarding the property's condition. The valuation is based on available photos and information, which might not be up to date. Desktop valuations are ideal for medium-risk loans, standard properties, or cases where a physical inspection is difficult.
Whilst desktop valuations are useful for many standard properties, they may not capture recent renovations or improvements that could affect the value. If you're considering a property with significant upgrades, we can help you evaluate whether this method is right for you.
Shortform and full valuations
In-person valuations, often referred to as shortform or full valuations, provide the most accurate and detailed property assessment. These valuations are typically required when the property is high-value, unique, or when other methods are inconclusive. A qualified property valuer conducts an on-site inspection to assess the property's external and internal condition, finishes, renovations, and any unique features.
The valuer evaluates both the property's physical condition and any special characteristics that might affect its value. Typically, shortform and full valuations take between 3–7 business days to complete and cost between $300 and $600, depending on property complexity. This method offers the most reliable and detailed assessment, accounting for property condition, improvements, and unique attributes.
Shortform and full valuations are often used for high-value loans, unique properties, or when previous valuation methods have not provided a conclusive result. At Buyvest, we help ensure that your financing plan accounts for the most accurate valuation method for your needs.
Understanding your property's valuation
Our mortgage brokers across Ryde, Parramatta, Baulkham Hills, and all NSW areas can guide you through the valuation process and help you prepare for the best possible outcome.
Loan-to-value ratio and its implications
Critical factor: Understanding how your bank valuation impacts your loan-to-value ratio (LVR) is crucial for securing the best possible mortgage terms and avoiding unexpected costs.
LVR is a critical factor in determining your borrowing capacity and loan terms. It's calculated using the bank's valuation of the property, not the purchase price, and has significant consequences for your financing options.
How LVR is calculated and what it means
The LVR formula is simple: Loan amount ÷ Bank valuation × 100 = LVR percentage. If you're purchasing a property and the bank's valuation differs from the agreed purchase price, your LVR will change. For example, if you're buying a $500,000 property with a $100,000 deposit, but the bank values it at $480,000, your LVR would be $400,000 ÷ $480,000 × 100 = 83.3 per cent.
In this case, the higher LVR could trigger Lenders Mortgage Insurance (LMI) requirements and potentially affect your loan terms. Key LVR implications include crossing thresholds (80 per cent, 85 per cent, 90 per cent) which can significantly affect your loan conditions, such as interest rates and insurance requirements. An LVR above 80 per cent generally triggers LMI, unless you're using a government-backed guarantee such as the First Home Loan Deposit Scheme. A higher LVR can result in a higher interest rate, as the loan is considered riskier for the lender. If your bank's valuation comes in lower than the purchase price, you may need to increase your deposit to maintain your desired LVR.
Understanding these implications helps you plan ahead and ensure you're in the best possible position to secure your property financing. At Buyvest, we'll work with you to strategise around these factors and get you the best possible loan terms.
Managing valuation gaps and mitigating risks
It's common for different valuation methods to produce varying results. If there's a discrepancy between different valuation methods (e.g. AVM versus physical valuation), the more detailed valuation method typically takes precedence. Banks tend to adopt a conservative approach and may use the lower of the valuations to manage risk. Lower valuations can reduce your borrowing capacity, requiring you to adjust your loan application or deposit.
Valuation discrepancies can pose risks, but there are several strategies you can employ to mitigate these challenges: request pre-purchase valuations before making an offer, ensure that the contract includes a subject-to-finance clause, conduct comparable sales research to set realistic expectations, keep additional funds aside to cover potential valuation gaps, and work with different lenders as they may have different valuation approaches. At Buyvest, we can help you identify which lender offers the best valuation process for your situation.
Optimising your property valuation
Preparation focus: While the bank's valuation is ultimately out of your control, there are steps you can take to maximise the chances of receiving a favourable outcome.
Preparing for a physical valuation
When a physical valuation is scheduled, it's essential to present the property in the best light to ensure that all value-adding aspects are considered. Ensure the property is clean, tidy, and well-presented—first impressions matter. Create a list of any recent renovations or upgrades and include approximate costs. Have plans, permits, and certificates on hand for any major works or changes to the property. Ensure the valuer can access all parts of the property, including any improvements or renovations. Offer details on recent comparable sales in the area to support the valuation outcome you expect. Whilst valuers are professionals, it's helpful to provide the information they need without pressuring them during the inspection.
Whilst valuers are impartial and won't be swayed by superficial changes, presenting your property in its best condition helps ensure that all the value-adding features are properly accounted for. At Buyvest, we're here to support you through the entire valuation process, ensuring you understand how to manage risks and optimise your chances of a favourable result.
Challenging unfavourable valuations
If the bank's valuation comes in lower than expected, it can significantly impact your loan and purchasing power. Whilst it's challenging to dispute a valuation, there are steps you can take: gather comparable sales data in the area to support your case, work with your broker to submit a formal dispute to the bank, share any details about features or improvements that the valuer may have overlooked, consider requesting a second valuation from a different lender, and explore alternative lenders who may offer different valuation approaches.
Banks have strict policies to ensure there is no conflict of interest between lending decisions and the valuation process, but at Buyvest, we can guide you through challenging situations and work with you to find solutions that support your financial goals.
Get expert support with your valuation
Navigate the valuation process confidently with Buyvest's expert guidance. We'll help you understand your options and achieve the best possible outcome.
Property type and valuation considerations
Certain types of properties, such as off-the-plan purchases, rural properties, or recently renovated homes, can require specialised valuation methods. Understanding these nuances is important for achieving the best possible loan outcome.
Off-the-plan purchases
Buying a property before construction is completed introduces unique valuation challenges. Valuations typically take place closer to settlement, not at the time of contract signing, and market conditions may change in the interim, affecting the final valuation. New developments may not have sufficient comparable properties, making it more difficult for valuers to accurately assess the value. Some developers add premiums to the price, but these may not be fully reflected in the bank's valuation. There is a higher risk of valuation shortfalls, which could require you to contribute additional funds at settlement.
For off-the-plan buyers, maintaining a financial buffer is essential. At Buyvest, we help you prepare for potential valuation challenges and find strategies to mitigate risk.
Unique, rural, and renovated properties
Non-standard properties, such as those located in rural areas or with unique characteristics, often require more detailed valuations due to their specialised nature. There may be fewer similar properties to compare, making it harder for valuers to determine an accurate value. Unique attributes, such as heritage features, may not be fully considered in a standard valuation. Properties with large land portions may be valued differently from urban properties. Properties in remote locations may receive more conservative valuations due to the limited market.
For renovated homes, valuers look at the added value of renovations, not just the cost of the improvements. The quality of renovations can significantly impact how much value is added to the property. Keep records of permits, warranties, and before-and-after photos of the renovations to help justify the added value. At Buyvest, we can help ensure that your renovations are properly considered and reflected in the bank's valuation.
Frequently asked questions
Why is the bank valuation lower than the price I'm paying?
Bank valuations may be lower than the purchase price because banks value properties to assess security for lending, not to determine market value for sale. Banks need a buffer in case they must repossess and sell the property quickly. Valuations include a margin to account for potential market downturns. Buyers often pay more due to emotional factors, which banks don't factor in. In fast-moving markets, property prices may rise more quickly than valuation methods can capture. Valuers may not have access to all relevant information about the property. In normal market conditions, the gap is usually 5–10 per cent, but it can be larger in fast-moving or unique markets.
How long is a bank valuation valid?
The validity period of a bank valuation typically ranges from 30 days to 3 months, depending on various factors. In volatile markets, valuations may have a shorter validity period. Each lender has its own guidelines for how long a valuation is valid. Unique or high-risk properties may have shorter validity periods. Valuations for pre-approval may have different timeframes compared to final loan valuations. If the settlement date is beyond the valuation's validity period, you may need to request a new valuation.
What happens if the valuation comes in below the purchase price?
If the valuation falls below the agreed purchase price, you have several options: increase your deposit to make up the difference, negotiate the price with the seller using the valuation as leverage, provide additional evidence to support a higher valuation, seek alternative lenders who may offer different valuations, pay for Lenders Mortgage Insurance if the LVR is too high, consider a family guarantee to cover the shortfall, or exit the contract if you have a finance clause. The best course of action depends on your financial situation, the size of the shortfall, and the terms of your contract.
How do I prepare for a bank valuation?
Proper preparation can help optimise the valuation outcome. Research comparable sales to look for recent sales of similar properties in your area. Ensure the property is clean and well-maintained. Have details of improvements, renovations, and permits ready. Make sure the valuer can access all areas of the property. List features and improvements made to the property. Be available to answer questions the valuer may have but avoid pressuring them. Remember that valuations are based on facts and market data, not personal preferences. These steps can't guarantee a higher valuation, but they help ensure the valuer has all necessary information.
Can I choose which valuer assesses my property?
Generally, you cannot select the specific valuer because lenders keep the valuation process separate from clients to ensure impartiality. Most banks work with a panel of approved valuation firms, and valuers are often chosen at random by the lender's automated systems. This approach prevents manipulation of the valuation process. Whilst you can't pick the individual valuer, our experienced mortgage broker can help you navigate the lender's valuation processes effectively.
Do different banks value properties differently?
Yes, banks can value the same property differently. Some lenders may be more conservative in their valuations. Lenders may use different methods or valuers for similar properties. Banks may have varying levels of familiarity with specific areas or property types. Different banks may approach unique properties, such as rural or off-the-plan developments, differently. It's a good idea to shop around as valuations can vary from one lender to another.
How much does a bank valuation cost and who pays?
Valuation costs vary depending on the type of valuation and property location. AVMs or computer-generated valuations are often free or $0–50. Desktop valuations typically range from $100 to $220. Shortform and full valuations usually cost between $300 and $1,200. Most lenders pass the cost onto the borrower, though some lenders absorb the valuation fee as part of their loan package. Valuation fees are usually disclosed upfront and can be added to your loan amount if needed.
Related resources for first home buyers
- Loan to Value Ratio (LVR) guide – understand how LVR affects your loan terms and helps you avoid extra costs
- Lenders Mortgage Insurance guide – learn how LMI works and strategies to minimise or eliminate this cost
- Securing a preapproval – start your property journey with confidence through expert guidance
- Pre-approval to home ownership – step-by-step guidance to secure finance and confidently buy
- Choosing the right finance – compare home loan options and find the best fit for your situation
- Mortgage repayment calculator – work out your repayments and explore different scenarios
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Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
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