Bank Property Valuations: How Does the Bank Determine Property Value?
Property valuations are an important part of the buying, selling and financing process. But determining a property valuation isn’t always straightforward – particularly when it comes to getting financing or refinancing. In fact, often homeowners find that the valuations they receive from real estate agents or professional property valuers – or even the price they received on sale of the property – differ significantly from bank property valuations.
Of course, when it comes to financing or refinancing a home, it’s the bank property valuations that matter. Because this is the amount the bank will use to determine how much you can borrow.
Bank Property Valuations
What is a bank valuation?
A bank valuation is simply an assessment of the value of a property that your bank undertakes. When they review a property, they will consider a number of factors. These might include:
- Location
- Condition of the property and the building
- Recent sales in the area
- Land size
- Property size
- Types of fixtures and fittings
- Number of rooms and bathrooms
- Vehicles access to the property
- Areas for improvement
They look at these factors to apply a value that lets them determine their risk in lending you money.
Why does a bank valuation matter?
Bank property valuations are important because they directly impact your borrowing power. Once the bank completes your valuation, they will use this as a factor in determining your loan-to-value ratio (or LVR).
A LVR equals your loan amount divided by the bank’s valuation of your property. This then lets the bank determine how much of a deposit to request (which is generally 20% of the property, or 80% LVR). In the situation where you have an LVR higher than 80% they can then also determine whether you need lender’s mortgage insurance (LMI).
In general, the higher your LVR the more risky you are as a borrower. And this will impact the amount that you can ultimately borrow and determine whether you will be required to purchase LMI.
Bank property valuations and purchasing a property
If you are looking to buy a property, your bank valuation is an important part of the process. But if it comes in lower than you’d like this will impact your LVR. And that means you might have trouble borrowing the amount that you need to purchase your desired home.
However, this doesn’t have to be the end of the road. If your bank valuation is lower than the amount of the property, you could consider some steps to get your application over the line.
Steps to improve your LVR
Some steps you could take include leveraging existing equity to cover the gap. You could top of the deposit with additional funds from another source. You could reach out to family to act as a guarantor. You could consider a different lender or loan type (such as a no deposit loan). You could even consider a different type of property.
Speaking with your loan advisor will help you determine the best way forward to ultimately get the funds that you need.
Bank property valuations and refinancing
Bank property valuations are also an important part of refinancing. And if it comes in too low, your application may be rejected.
Again, this doesn’t have to be the death knell of all your property dreams. You could consider purchasing LMI which might help get the application over the line. Or you could find ways to pay down the current mortgage and build up some more equity that will make you a better borrowing risk for the banks.
Of course, a lending specialist can also work with you to consider other lenders who may have a higher risk tolerance or consider different factors.
Read more: How long does it take to refinance a home loan?
