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As hundreds of thousands more Australian households reach the end of their cheap fixed rate mortgages, many are anxiously hoping to avoid mortgage prison. This where they’re locked into a high interest rate, but aren’t able to refinance with another lender due to the tighter lending criteria. 

But refinancing your home loan isn’t just about your ability to repay your loan. Your bank also looks at the value of your property. A change in your property valuation can affect how much your bank is prepared to lend you. This, in turn, affects what price you can offer (if you’re making a new property purchase), or whether you’re able to refinance. 

No home loan gets approved without a property valuation. The calculation of the value of your property and the loan you want to take against it, is known as your Loan to Value Ratio - or LVR.

LVR: How it affects your home loan refinance

Example: you’ve purchased your home for $800,000, with a 20% deposit and a home loan of $640,000. Your LVR is 80%, because the bank has loaned you 80% of the value of your home.

Times have changed and you’d like to refinance your home loan. You’d also like to borrow a little extra against your home to fund some renovations. You’d like a new loan for $670,000. 

Your original valuation was based on your purchase price of $800,000. If your property was still valued at $800,000, your new LVR will be over 88%, and less likely to be approved by your bank. You’ll also have to pay Lender’s Mortgage Insurance, because you’re borrowing above 80% of your property’s value.

Getting an up-to-date valuation may find your home has increased in value to $850,000. The amount you want to borrow is only 79% of your property’s current value. This is below your bank’s 80% LVR threshold, so your new loan application has a good chance of success.

We’ve invited experienced property valuation specialist Chris Mason, Director of Mason’s Valuation Office, to share his insights into a part of the refinancing process that makes a massive difference to your financial health.

What does a property valuer do?

Property valuers offer professional advice to individuals and businesses who buy, sell, and rent land and/or property. They estimate the market value of land, buildings, and real estate. One of the ways they do this is by comparing recent sales of properties with similar features in similar locations to one another, gaining valuable market insights as well as a specific valuation.

Does a property valuer work independently for an individual client? Or for the banks and financial institutions?

 “Regardless of who engages the services of a valuer, the valuer should provide independent, unbiased and well-researched advice,” Chris says. “A valuer may provide their advice to individuals, companies, banks and lenders.”

At the end of the day, though, the valuer’s client is the one who settles their invoice. Banks acquire a valuation for every property against which they lend money. So when a place you’re trying to buy gets a ‘bank-ordered valuation’, the bank is their client. 

Some lenders require the buyer / borrower to pay for their own valuation, but they still use their chosen valuers. In these cases, the lender is still the client, because they requested the valuation. 

If you pay for your own valuation you’re entitled to view the valuer’s report. This isn’t always the case when the bank pays the valuer.

When you’re refinancing a property you already own, your new lender will look to have this property valued as well. 

If you’re refinancing with your current lender, they may request a new valuation, or they may just work off the previous one they have on record.

This depends on how long ago your initial valuation was done, and how volatile property sales in the area have been.

When should you get your property valued?

“When you’re looking to purchase a property to live in, or as an investment, a valuation provides good feedback on what you should pay for the property,” Mr Mason explains. “This prevents you wasting time on a property that’s not worth what you thought it was.”

There are times a valuation may be legally required. This usually occurs in a case where the value of the property (i.e. asset) is disputed. This can be a matter or business, or it may be family-related. Settling a deceased estate, or cases of divorce, often legally require assets like property to be valued for family court. In these instances the court may appoint a valuer, and the parties to the court action are usually required to pay for this valuation.

A quality valuation of your property helps you to understand where the property sits in relation to the rest of the local market. As a buyer, you can save time by negotiating realistically with sales agents and/or family to arrive at a reasonable purchase or sale price.

Other times property valuations are required might include:

• capital gains tax purposes.

• pre-sale or pre-purchase valuations.

• all SMSF/DIY Super funds are obligated to lodge an annual return with the Australian Taxation Office (ATO) – and the ATO suggests that all SMSF/DIY Super funds should use market values for all valuations.

How much does it cost to get a property valuation? How long is the valuation valid?

Valuations can start at around $600 for basic residential properties, through to thousands of dollars for commercial and specialised properties. According to Mr Mason: “A valuation report does not generally carry an expiration date, but property values evolve all the time. I’d say a valuation report is typically relevant for about six to twelve months.”

In the case of a bank-ordered valuation, this would be up to your lender.

The bottomline:

A key step in your home loan application process includes your lender doing their own valuation of your property (or the property you want to buy, if it’s a new purchase).

Should the property be valued lower than the price you offered for it, your lender may not complete your home loan offer for the amount you need, which limits your options for refinancing.

In the case of a new property purchase, a lower than expected valuation can mean you’re unable to buy your desired home. If you’re bidding at an auction, you’ll want to ensure you’ve had your bank valuation done well in advance of your auction date, or you could be on the hook to complete the home purchase, without your lender.

Go deeper: 9 free websites for judging your property’s value

Disclaimer: The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.