All You Need to Know About Bank Valuations

When it comes to property valuations in Australia, there are generally two primary types: market valuations and bank valuations. A market valuation represents the estimated price your property could sell for in the current market. Whereas a bank valuation is conducted by professional valuers employed by the banks. This assessment focuses on the property’s quick sale value, and considers a number of factors that help protect the lender’s financial risk.

When it comes to residential properties a bank valuation is conducted by a certified valuer on behalf of a bank or financial institution. This house valuation is primarily used to determine the loan amount a bank is willing to lend to a borrower. 

Unlike a market appraisal, which might reflect what a property could sell for based on current market conditions, a bank valuation tends to be more conservative, focusing on the property’s tangible characteristics, recent comparable sales, and potential risks. The objective of a bank valuation is to ensure that the property provides adequate security for the loan, mitigating the bank’s financial risk.

An accurate property valuation is essential because it directly impacts their lending decisions and risk management. Overvaluing a property can result in the bank lending more money than the property is worth, leading to potential losses if the borrower defaults. Conversely, undervaluing a property may limit the loan amount available to the borrower, possibly affecting their ability to purchase the property.

In this modern day and age, there is lot’s more statistical and analytical data available, especially due to the likes of realestate.com.au and other websites and data sources. Banks will now do a range of different types of valuations, such as:-

• AVM – Automated Valuation Model
• IVM – Internal Valuation Modelling
• Desktop valuation
• Drive by assessment
• Short Form valuation
• Long Form valuation

So what valuation do I need?

Great question.

The banks will make that assessment at the time of the request. For example though, if a clients’ LVR is low, say less than 70% of the value of the property, then it is highly likely that the automated valuation Models will pick up a reasonable estimate of property value and the bank will be ok to accept.

If, however, there is a reason like the property wasn’t purchased “on the market” i.e. through a real estate agent or advertised, then it’s likely that a bank will want to get some reasonable assessment of value and a drive by or short form valuation might be acceptable.

And then, if the property is being constructed or a luxury property then a full or long form valuation may be applicable.

Valuing residential properties differs from valuing other assets, such as commercial real estate or stocks, due to the unique nature of the residential market. 

House valuations must consider a variety of factors, including location, property condition, market trends, and future growth potential in the area. Additionally, banks must account for the fact that residential properties are more susceptible to market fluctuations and are influenced by factors such as interest rates and economic conditions. Unlike other assets that might generate income or be more liquid, residential properties are often held for personal use, making their valuation more complex and crucial for accurate lending decisions.

When purchasing a property in Australia, a bank valuation is a critical step in the home loan process. This valuation, conducted by an independent valuer on behalf of the bank, determines the property’s value from the lender’s perspective. It assesses how much the bank is willing to lend and plays a crucial role in calculating the loan-to-value ratio (LVR), which directly impacts your borrowing power. 

The LVR is a percentage determined by dividing your loan amount by the bank’s valuation of your property, helping the lender evaluate the risk involved in approving the loan. Typically, lenders require a 20% deposit, equating to an 80% LVR, and exceeding this threshold may result in additional costs like lenders mortgage insurance (LMI).

Bank valuations tend to be more conservative than market valuations as they focus on the property’s fundamental characteristics and potential risks rather than current market trends. Factors such as location, property condition, zoning, and recent sales of similar properties are all carefully considered during the valuation. 

If a bank valuation comes in lower than expected, it could limit your borrowing capacity.

• Save a larger deposit: The more you save, the less you’ll need to borrow.
• Negotiate with lenders: Some lenders may be open to reassess your property if market conditions improve or look to change.
• Choose a less expensive property: Look for properties with a lower purchase price that don’t require you to overextend your finances. This means a bigger deposit and a lower LVR.
• Request assistance from family: Parents could act as a guarantor and use their property as security, you could borrow a smaller deposit for the loan, avoid LMI and have a lower LVR. 

A bank valuation can significantly influence your home-buying journey, as it determines the maximum loan amount a lender will offer. This valuation is integral to the home loan application process, as it affects the LVR, which lenders use to assess the risk of lending to you. If the bank valuation is lower than the purchase price, you may need to find ways to bridge the gap, such as using existing equity, increasing your deposit, or enlisting a guarantor.

Ultimately bank valuations are crucial in determining your loan-to-value ratio (LVR), which directly influences the amount a bank is willing to lend and the interest rate you could be offered. It’s important to be prepared that a bank valuation might be lower than the purchase price. Understanding this process can help you better navigate your property journey with realistic expectations.

Purchasing a property can be daunting, if you’re looking for your first, or next property, Intuitive Finance can provide expert support regardless of what stage of the property ownership journey you are on.

If you would like to know more about bank valuations, you’re looking for a new loan or to refinance a current loan. Book your complimentary finance strategy meeting with one of our brokers.

Disclaimer: The information provided in this article is general in nature and does not constitute personal financial advice. This information has been prepared without considering your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information regarding your objectives, financial situation and needs.