All You Need to Know About Bank Valuations

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.

• 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.

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.

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. 

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.