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Your lender's property valuation is one of the key steps in your home ownership journey. The estimated value of the property you want to buy affects more than your loan size and your interest rate. It also impacts whether or not you’ll be up for additional borrowing costs.

In the past, most lenders accepted the sale price of a home as its default valuation as - obviously - this was an amount at least one buyer was willing to pay. These days, the lending landscape looks a little different.

Banks are tightening their loan criteria and financing a new home is becoming increasingly difficult. If you’re on the lookout for a new home and/or a better home loan for yourself and your family, this won’t be news to you at all.

Your home valuation impacts:

• Your borrowing capacity (i.e. how much your bank is willing to lend you - even when you’re refinancing).

• Your interest rate.

• Your Loan to Value ratio (also known as your LVR). We’ve written about this here.

Your chances of being approved for a new loan with an LVR of over 80% are lower than they've been for years.

An LVR above 80% means most lenders require you to pay Lender’s Mortgage Insurance (LMI) as well, pushing your total loan amount higher and increasing your repayments. This is the last thing any home owner wants, especially in this climate of higher interest rates.

Lender valuation vs Market valuation:

There is a difference between these two, and it’s a matter of perspective.

A bank valuation is usually more conservative than your market estimates because, in the event you default on your loan, the bank wants a quick sale that can make back enough to cover your loan: that’s it. They’re not looking for any ‘best price’ gains. 

A market valuation is more of an estimate and includes reported real estate agent valuations and the old sales data, which can be inflated, or outdated.

That said, the market value of your home should still be taken into account when your lender gets your home valued during your loan approval process. It appears this isn’t happening as much right now.

Low bank valuations are “increasingly common”.

According to Compare Club’s mortgage brokers, some lenders are providing borrowers with lower valuations than previously. This has a very real knock on affect when it comes to getting your loan approved.

Take even more caution at auctions:

If you’re bidding at auction, you’ll want to ensure your lender agrees with your market price so you can have the best possible idea around how high you can bid.

The last thing you want is to win the bid for your dream home, pay your deposit, only to find your bank doesn’t agree with your purchase price. 

And if you're serious about bidding for a property at auction you’ll want to have your finance sorted out beforehand because if you do bid, you could win!

Be aware: there are no cooling off periods at property auctions. If you’re the winning bidder, you’re expected to pay your deposit and close the sale within the timeframes detailed in your sale contract.

Organising your loan pre-approval before the auction is something your broker helps with, and while not set in stone a pre-approval allows you to bid with a lot more certainty.

A Valuable Example: Two Chefs & a Broker

A recent example from one of Compare Club’s mortgage brokers illustrates just how much valuations can affect your home loan application.

Our mortgage broker Grant Ross recently spoke to a couple with steady incomes (two chefs), who wanted to to refinance their $410K mortgage.

• The first lender valued their home at $450K = 91% LVR.

• The second lender’s valuation came in at $470K = 87% LVR.

• The third lender’s valuation was $524K = 78% LVR.

The variance across the three valuations is a massive $74K - all for the very same piece of real estate.

Either of the first two lenders would have required Lender’s Mortgage Insurance (LMI), which would be added to the loan amount and push the LVR, interest rate, and home loan repayments much, much higher.

The third lender’s valuation means that Grant’s clients refinanced from their old lender at an interest rate of 10.79%, to 6.38%.

Their monthly home loan repayments fell from around $3,850 to $2,570, giving them back $1,280 per month - all because one bank valued their home higher than the others.

Lender valuations:

One of the advantages of working with an expert broker is that they know which lenders are valuing certain properties higher than others, because this changes often.

Many of the variations have nothing to do with your home loan application at all, or even the true market value of your home. A bank valuation may come back lower because:

• Your bank already holds a lot of mortgages in the building, or postcode, or town you want to buy in. Lenders like to spread their risk, and there’s no way to know this in advance, unless you’re a broker.

• Your local area has had fewer sales in the past year; this can have a lender thinking your home area isn’t desirable, and they won’t recoup their investment quickly. It could just as easily mean that no one wants to move away - but lenders aren’t optimists.

• Your lender may be reducing the number of loans they hold for a certain type of building (such as unit blocks of over 40 units, or apartments under 60m2 in area).

One lender may have a preference for a certain postcode, and value homes in that area more highly than another lender would.

Your property valuation can also be seasonally affected. For example, if the bank’s valuation averages recent sales in a coastal postcode, they’ll likely come back with a higher valuation in the warmer months. It’s also a fact that there are more sales in spring than in winter for most Australian towns.

The bottom line:

Every home loan application requires a lender’s valuation of your property. This holds true whether you’re applying for your first ever home loan, or seeking to refinance your existing property.

Your lender’s valuation affects your borrowing capacity, interest rate - and your endgame loan approval.

When bidding at auction, a pre-approval helps ensure you can proceed smoothly with your purchase.

Finding a lender that values your home as close to market as possible is part of a good broker’s job.