Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
What is a property valuation?
Whether you are buying or selling, you will mostly likely need an accurate property valuation. But not all valuations are the same, because what a property is worth and what someone may be willing to pay for it are two very different things.
A lender valuation is the price a bank or non-bank lender values a property. Factors that will be considered within this valuation include the land, the dwelling itself, the neighbourhood, access to amenities, demand for the area and many other factors.
The price you pay for a property and what the lender valuation is may not be the same. For example, you may look at a property advertised for sale for $500,000, however when you go to a lender for a home loan, they may independently value the property at $450,000.
The reason this is so important is that the bank will use this valuation to calculate the loan-to-value ratio or LVR. A loan-to-value ratio, or ‘LVR’ is the value of a property in comparison to the amount of money being borrowed through a home loan. LVR is calculated as a percentage, and is then used by lenders to assess the risk of accepting a loan application. The lower the LVR, the lower the likely risk that particular loan is to a potential lender.
Your LVR percentage is particularly important when house hunting as it gives you some indication of your borrowing power. A good LVR can also help you avoid certain home loan fees such as Lenders Mortgage Insurance (LMI), and also attain a more competitive interest rate. Most lenders will not charge lenders mortgage insurance on loans with an LVR of 80% or less - a 20% deposit - though some offer no-LMI loans if borrowers have a 15% deposit.
Pre-approval arms you with knowledge of how much you can borrow for a home loan before you start looking at homes or bidding at an auction. In today’s hot property market it can be risky to purchase a property without pre-approval - unless you’re a cash buyer.
The process of pre-approval involves you going to a lender, and essentially proving your ability to afford a home loan. A lender will look at influencing factors like your pay slips, your savings and your spending habits to determine what value home loan you can realistically afford. They will then 'pre-approve' you for a home loan.
This pre-approval will show a maximum value you are able to afford, for example, after looking at your savings, spending and income history, a lender may give you pre-approval for a home loan of up to $500,000.
This process is designed to help you understand your own borrowing capacity, which can also prevent you from purchasing a property you may struggle to afford the repayments on. However, pre-approval is also called conditional approval, and for good reason - it’s not water-tight. Before committing to a purchase, it’s likely you’ll still need unconditional approval.
When you purchase a home, banks and non-bank lenders will complete their own valuation on a property. This valuation is what determines your LVR. If you already own a home, you can easily compare the cost of a valuation by contacting individual lenders.
Valuations usually cost anywhere from $0 to $400. However, the cost of a valuation can sometimes be waived when buying a home if you plan to take out a loan with that lender.
Your lender may value the property at a lower price than what the house is selling on the market for. This is called a valuation shortfall, essentially it means banks are not willing to lend you the money you originally applied for. This is important as it determines your LVR. If this occurs, you’ll likely need to come up with more of your own money or keep shopping for either another home or another lender.
However, the loan may still go ahead, but if your LVR is higher than 80% you’ll most likely need to pay LMI. For example, if the purchase price is $600,000, you need to borrow $420,000 to achieve an 80% LVR. If the lender then values the property at $500,000, your LVR would bump up to 84% based on the same $420,000 borrowed.
The pandemic has driven up the price of the property market in many parts of Australia. In simple economics, supply and demand will generally always influence the value of an asset, and property is no different.
Coastal towns throughout the pandemic such as Byron Bay saw property values sky-rocket. This was due to a low supply of properties coming on the market, at the same time as many potential buyers were seeking property in the area.
However, if there is a lack of buyer demand in an area or too many houses on the market, property value may remain the same, or decrease.
Location is a significant factor in the value equation. A house and land, close to a capital city, with access to public transport, good schools and small businesses like cafes and restaurants, will most likely be worth more than the same size house and land in a remote town.
Researching the suburb is a great way to understand the value of the house if you are looking at buying. If you want to get a value of a house you own, factors such as proximity to schools, parks and shops will all influence the property’s value.
When researching the suburb or town of a property, looking for similar properties in the same area will also help you understand the market value.
The physical structure of a property is a key denominator of its value. Potential buyers need to know if a property is in serious need of renovations or upgrades. Factors such as the age, materials and size of the property will all influence its overall value.
The same goes for features like pools, gardens or decks. Potential buyers want to know the time and money it will cost to maintain these features, or if they need to be fixed. These factors will all be priced into a property’s value.
The layout and size of your property also plays a significant role in determining its value. A property with more than one bathroom, multiple bedrooms and a functional overall layout could be viewed as more appealing and valued higher.
In saying this, many buyers will choose location over layout and size, however it does depend on other factors like the demographic interested in the property, whether it be young professionals, families, investors and so on.
You may have heard of an online or market valuation. Usually, these valuations are generated by real estate websites such as Domain or REA group. These offer an estimated value and can therefore be used as a way to estimate a property. However, it’s important to be wary of using these as accurate appraisals, as they aren’t coming from a lender.
Additionally, buyers or sellers should also be wary of estimates coming from real estate agents or online tools that use algorithms to generate estimates. Real estate agents are likely valuing properties based off their own judgment and agendas. Unfortunately, these aren’t always going to align with how a lender values a property.
If you’re ready to inquire about finding a home loan that’s right for you, check out our competitive home loans or chat to one of our lending specialists to help you get into the property market.
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