Understanding bank valuations
This guide explains how bank valuations work, the three main valuation methods, how valuations affect your Loan to Value Ratio, and what to do if a valuation comes in lower than expected. For the broader buying process, read our property purchase and valuation guide and our pre-approval to home ownership guide.
Quick summary: A bank valuation is an independent assessment of a property's value conducted for the lender, not the buyer. It is typically more conservative than market value. Three methods are used: automated (AVM), desktop, and in-person (shortform/full). The valuation determines your LVR, which affects your interest rate, LMI requirements, and overall borrowing capacity. If the valuation comes in lower than the purchase price, you have several options including negotiating with the seller, increasing your deposit, or seeking a different lender.
What is a bank valuation and why does it matter?
A bank valuation is an independent, professional assessment of a property's value used by lenders to determine how much the property is worth as security for your mortgage. Unlike a market appraisal from a real estate agent, a bank valuation takes a conservative approach, focusing on risk management and quick-sale scenarios rather than optimistic market conditions. The valuation is conducted for the bank's benefit, not yours as the buyer.
The bank valuation affects several critical aspects of your purchase. It determines your maximum loan amount (based on the valuation, not the purchase price). It affects your deposit requirements, because a lower valuation may mean you need a larger deposit. It determines whether you need LMI if your LVR crosses the 80% threshold. A significant gap between purchase price and valuation could put your loan approval at risk. And understanding the valuation process gives you negotiation leverage, plus a finance clause protects you if the valuation creates a funding shortfall.
Bank valuation versus market valuation
One of the most important concepts to understand is the "valuation gap", which is the difference between the bank's valuation and the market value or purchase price. Banks use more conservative valuations to protect their investment, factoring in potential market downturns and quick-sale scenarios. In volatile markets or for unique properties, this gap can be larger. In normal market conditions, the gap is usually 5 to 10%, but it can widen in fast-moving or unusual markets.
As a buyer, especially in competitive markets, it is 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. Having a financial buffer is essential, particularly if you are buying through auction where there is no cooling-off period. For private treaty purchases, including a subject-to-finance clause in your contract protects you if the valuation creates a shortfall.
Three main valuation methods
Automated Valuation Models (AVM)
AVMs provide a quick, cost-effective assessment using algorithms that analyse historical sales data, property attributes, and market trends. Results are typically available almost instantly at little or no cost. AVMs are reliable for standard properties in areas with strong sales activity and comparable data. However, they cannot account for the property's current condition, recent renovations, or unique features. AVMs are commonly used for lower-risk loans, refinancing, or preliminary assessments.
Desktop valuations
Desktop valuations are carried out remotely by a qualified valuer without a physical inspection. The valuer reviews property listings, photos, floor plans, and comparable sales data to determine value. Desktop valuations are typically completed within 1 to 3 business days and cost $100 to $220. They offer more nuance than AVMs but can still miss details about the property's actual condition, as the assessment relies on available photos and information which may not be current. Desktop valuations are suitable for medium-risk loans and standard properties.
Shortform and full valuations (in-person)
In-person valuations provide the most accurate and detailed assessment. A qualified valuer conducts an on-site inspection, evaluating the property's external and internal condition, finishes, renovations, and unique features. Shortform and full valuations typically take 3 to 7 business days and cost $300 to $600 depending on property complexity. This method is required for high-value loans, unique properties, or when other methods have not produced a conclusive result. It offers the greatest reliability because the valuer sees the property firsthand and can account for condition, improvements, and special characteristics.
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How valuations affect your LVR and loan terms
Your Loan to Value Ratio is calculated using the bank's valuation, not the purchase price. The formula is: loan amount divided by bank valuation, multiplied by 100. If you are purchasing a $500,000 property with a $100,000 deposit but the bank values it at $480,000, your LVR would be $400,000 divided by $480,000, equalling 83.3%.
Crossing key LVR thresholds (80%, 85%, 90%) significantly affects your loan conditions. An LVR above 80% generally triggers LMI, unless you are using the Home Guarantee Scheme (which allows 95% LVR without LMI) or the Help to Buy Scheme (which allows 98% LVR with government equity). Higher LVRs also result in higher interest rates. If the bank's valuation comes in lower than expected, you may need to increase your deposit to maintain your target LVR. Use our property deposit calculator and home equity calculator to model how different valuations affect your deposit requirements.
Managing valuation gaps
It is common for different valuation methods to produce varying results. If there is a discrepancy, the more detailed method typically takes precedence, and banks tend to use the lower figure. Several strategies help manage valuation risk: request pre-purchase valuations before making an offer, include a subject-to-finance clause in your contract, conduct comparable sales research to set realistic price expectations, keep additional funds aside to cover a potential gap, and work with a broker who knows which lenders have different valuation approaches and panel valuers.
Preparing for and challenging valuations
Preparing for a physical valuation
While the bank's valuation is ultimately out of your control, you can maximise your chances of a favourable outcome. Ensure the property is clean, tidy, and well-presented because first impressions matter even for professional valuers. Create a list of recent renovations or upgrades with approximate costs. Have plans, permits, and certificates ready for any major works. Ensure the valuer can access all areas of the property including any improvements. Provide details on recent comparable sales in the area to support a fair valuation. Be available to answer questions but avoid pressuring the valuer during the inspection.
Challenging an unfavourable valuation
If the valuation comes in lower than expected, several options are available. Gather comparable sales data to support a higher figure. Work with your broker to submit a formal dispute to the bank. Share details about features or improvements the valuer may have overlooked. Request a second valuation through a different lender. Or explore alternative lenders who may use different valuation panels or approaches. Your broker's knowledge of which lenders tend to value more favourably in specific areas and property types is invaluable in these situations.
Valuation considerations for different property types
Different property types present different valuation challenges. Off-the-plan purchases are valued closer to settlement rather than at contract signing, meaning market conditions may change in the interim. New developments may lack sufficient comparable properties, and developer premiums may not be fully reflected in valuations. Maintaining a financial buffer is essential for off-the-plan buyers.
Properties in rural areas or with unique characteristics often require more detailed (and therefore more expensive) valuations due to fewer comparable properties and specialised features. Freestanding houses with large land portions may be valued differently from urban properties. Strata apartments and townhouses are generally easier to value due to more comparable sales data. For vacant land and construction, valuations are handled differently at each stage of the build. Understanding how your property type affects valuation helps you anticipate the process and plan your budget accordingly.
For renovated homes, valuers assess the added value of renovations, not just their cost. The quality of work significantly impacts how much value is added. Keep records of permits, warranties, and before-and-after documentation to help justify the value. Our location, condition, and vibes guide helps you evaluate a property's condition before purchase, and our how to buy the right property guide compares all property types.
Frequently asked questions
Why is the bank valuation lower than the price I am paying?
Banks value properties to assess security for lending, not to determine market value for sale. They build in a buffer for potential market downturns and quick-sale scenarios. Buyers often pay more due to emotional factors and competitive bidding, which banks do not factor in. In fast-moving markets, prices may rise more quickly than valuation methods can capture. In normal conditions, the gap is usually 5 to 10%, but it can be larger in hot or unusual markets.
How long is a bank valuation valid?
Validity typically ranges from 30 days to 3 months, depending on the lender and market conditions. In volatile markets, validity periods may be shorter. Valuations for pre-approval may have different timeframes compared to final loan valuations. If settlement is beyond the validity period, a new valuation may be required.
What happens if the valuation comes in below the purchase price?
You have several options: increase your deposit to make up the difference, negotiate a lower price with the seller using the valuation as leverage, provide additional evidence to support a higher valuation, seek a different lender who may value the property differently, pay LMI if the higher LVR is still acceptable, consider a family guarantee to cover the shortfall, or exit the contract if you have a finance clause.
How do I prepare for a bank valuation?
Research comparable sales in the 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. List all features and improvements. Be available to answer questions without pressuring the valuer. These steps cannot guarantee a higher valuation but ensure the valuer has all necessary information to make a fair assessment.
Can I choose which valuer assesses my property?
Generally, no. 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 assigned through automated systems. This prevents manipulation of the process. However, your broker can guide you toward lenders whose valuation panels tend to be more favourable for your area and property type.
Do different banks value properties differently?
Yes. Some lenders are more conservative than others. Different lenders may use different methods, valuers, or panels for similar properties. Banks have varying levels of familiarity with specific areas or property types. This is why working with a broker who knows which lenders tend to value more favourably in your target area can make a significant difference to your outcome. Use our mortgage repayment calculator to compare how different valuations affect your monthly costs.
How much does a bank valuation cost and who pays?
Costs vary by method: AVMs are typically free or $0 to $50, desktop valuations cost $100 to $220, and shortform or full valuations cost $300 to $1,200 depending on property complexity and location. Most lenders pass the cost to the borrower, though some absorb the fee as part of their loan package. Valuation fees are usually disclosed upfront and can sometimes be added to your loan amount.
Take the next step
Understanding how bank valuations work helps you anticipate this critical step in your home buying journey. Start by securing pre-approval to confirm your borrowing capacity, then explore your pathways to home ownership including the Home Guarantee Scheme, Help to Buy, stamp duty concessions, the First Home Owner Grant, and the FHSSS. Understand the benefits and risks of low-deposit purchases and ensure your genuine savings meet lender requirements. Our choosing the right finance guide helps you select the best loan structure for your situation.
Use our property deposit calculator, home equity calculator, and mortgage repayment calculator to plan your finances. Learn more about our team, or explore our service areas across 220+ Sydney suburbs.
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Related resources for first home buyers
Continue building your knowledge with our LVR guide to understand how valuations affect your loan terms, our LMI guide to understand when insurance applies, our property purchase and valuation guide for the full buying process, our essential first home buyer tips covering six key areas, and our choosing the right finance guide to compare loan types and features.
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