How lenders value property for a home loan

Every home loan is secured against a property, and the lender forms its own view of what that property is worth. The loan to value ratio, the interest rate offered, whether mortgage insurance is payable and in some cases whether the loan proceeds at all are all determined by that figure rather than by the price agreed between buyer and seller.

Most borrowers encounter valuations only when one comes in lower than expected, at which point the consequences are immediate and the options are limited. Understanding what a lender's valuer is actually doing, and why it differs from what an agent says, makes the process considerably less alarming.

A valuation is not an appraisal

Three different figures are commonly confused.

• An agent's appraisal is a marketing opinion of the likely selling range. It is free, it is not independent of the agent's interest in winning or selling the listing, and it is not a valuation.
• An automated online estimate is a statistical model applied to sales data and property attributes. It has no inspection behind it, is often wrong on properties with unusual features, and no lender relies on it as a substitute for its own process.
• A lender's valuation is an assessment prepared for the lender by a qualified valuer, generally a member of the Australian Property Institute, under instructions that require a conservative and defensible figure. The lender is the client, not the borrower, even where the borrower pays for it.

That last point explains most of the frustration borrowers feel. The valuer is answering the question the lender asked, which is what this property would reliably realise if it had to be sold, not what an enthusiastic buyer might pay on a good day.

The types of valuation lenders use

Lenders match the depth of the valuation to the risk of the loan. The higher the loan to value ratio, the more thorough the valuation.

Type	What is involved	Typically used for
Automated valuation model	A statistical estimate from sales data, with no human inspection	Low ratio refinances and repricing, where the lender's confidence in the model is high
Desktop valuation	A valuer assesses from available data, photographs and comparable sales without visiting	Lower ratio loans on standard properties in well traded markets
Kerbside valuation	The valuer inspects the exterior only, from the street	Mid range ratios, where external condition matters but internal access is not required
Full valuation	Internal and external inspection, with a detailed written report	Purchases, higher ratio loans, construction, unusual properties and most investment lending

A borrower does not usually choose the type. The lender's system selects it from the ratio, the property type, the postcode and the loan purpose. Where a low ratio loan is assessed by an automated model, the process can be almost instantaneous, which is why some refinances complete unusually quickly.

How a valuer arrives at a figure

For established residential property the dominant method is direct comparison. The valuer identifies recent sales of comparable properties, adjusts for differences and derives a value for the subject property.

The factors that carry weight include:

• Recent settled sales in the immediate area, generally within the last three to six months. Settled sales are preferred to listings or reported prices, because a listing is an aspiration and an unsettled sale may not complete.
• Land size, frontage and orientation, which in most markets carry more weight than internal presentation.
• Building area and configuration, particularly the number of bedrooms and bathrooms and the presence of secure parking.
• Condition and age, and whether improvements are structural or cosmetic.
• Zoning, planning constraints and easements.
• Negative external factors, such as a main road, flood or bushfire overlays, power infrastructure or a difficult aspect.

Two features of the method explain most low valuations. Comparable sales look backwards, so in a rapidly rising market valuations lag the prices being achieved at auction today. And valuers are instructed to be conservative, so in a thin market with few comparable sales they will resolve uncertainty downwards rather than upwards.

Why a valuation may come in low

• A rising market. The comparable sales are from months ago and do not reflect current competition.
• A strong auction result. A price driven by two determined bidders is not necessarily what the property would reliably realise, and valuers discount it accordingly.
• Few comparable sales. Common for unusual properties, rural and lifestyle blocks and small or unique apartments.
• Property type restrictions. Many lenders reduce maximum ratios for apartments below a defined internal floor area, commonly around 40 or 50 square metres, and maintain building and postcode exposure lists.
• Condition issues found on inspection, including structural movement, defects or an incomplete renovation.
• Off the plan purchases, where the contract was signed years before the valuation, examined in the guide to buying off the plan.
• Renovations that did not add value, where the cost exceeded the increase in market value.

What a low valuation actually costs

The consequence is arithmetic rather than discretionary. The lender lends against the lower of price and valuation, so the shortfall is funded in cash.

The following is illustrative only. Assume a buyer purchasing at $700,000 with $140,000 available, expecting a loan to value ratio of exactly 80 per cent and no mortgage insurance.

Scenario	Maximum loan at 80 per cent	Additional cash required
Valuation at $700,000, matching the price	$560,000	Nil
Valuation at $670,000	$536,000	$24,000
Valuation at $650,000	$520,000	$40,000

The alternative to funding the shortfall is to accept a higher loan to value ratio and pay mortgage insurance. At a $670,000 valuation, the required $560,000 loan represents 83.6 per cent of valuation, which is achievable with a premium. At $650,000 it represents 86.2 per cent, which is also achievable but at a higher premium and with more restrictive policy. The LMI calculator estimates the cost, and the guide to the loan to value ratio explains the bands.

What a borrower can do about a low valuation

The options are real but limited, and they work better when exercised promptly.

1. Ask for the report, or at least the comparable sales relied on. Policies differ on whether a borrower is entitled to the full report, since the lender is the client, but most will disclose the comparables.
2. Identify factual errors. An incorrect land size, an omitted bedroom or bathroom, a missed renovation or an incorrect zoning are the errors most often corrected. A factual error is a far stronger basis for review than a difference of opinion about value.
3. Supply better comparable sales. Recent settled sales of genuinely similar properties, with evidence. Listings and unsettled sales carry little weight.
4. Request a review or a second valuation. Most lenders have a process, although it is discretionary and the same valuation firm may conduct it.
5. Try another lender. Different lenders use different valuation panels, and valuations of the same property genuinely differ. This is the most effective remedy in practice, though it takes time that a purchase with a settlement date may not have.
6. Renegotiate the purchase price. Where the contract is still conditional, a valuation below the price is a reasonable basis for a conversation with the seller.
7. Commission an independent valuation. At the borrower's cost, and it will not bind the lender, but it can support a review.

Valuations on a refinance

A refinance has no purchase price to anchor the valuation, so the ratio rests entirely on the new lender's figure. This cuts both ways: a borrower whose property has risen may cross into a better pricing tier, while a borrower whose property has not may find the refinance does not achieve what they expected.

Two practices help. The first is to obtain an upfront valuation before submitting an application, which many lenders allow and which avoids a formal application and its credit enquiry if the figure is unsatisfactory. A broker can often request upfront valuations from several lenders. The second is to remember that the existing lender can usually reprice an existing loan without any valuation at all, which is the simplest route where the only objective is a lower rate. The guide to how to refinance a home loan sets out the sequence.

When a lender will not accept the property at all

A valuation answers what a property is worth. A separate question, decided by the lender rather than the valuer, is whether it will accept that property as security at all, and at what maximum ratio. A property can be valued accurately and still be unacceptable.

The categories that most often cause difficulty are:

• Small apartments. Many lenders reduce the maximum ratio below a defined internal floor area, and some decline studios entirely. The relevant measure is usually internal area excluding balconies and car parking, which can be smaller than the area advertised.
• High density buildings and concentrated postcodes. Lenders maintain exposure lists limiting how much they will lend in a particular building or area, and these change without notice.
• Serviced apartments, student accommodation and hotel style units, which have restricted resale markets.
• Company title and some strata title variations, which do not provide the form of security lenders prefer.
• Large rural and lifestyle holdings, where maximum ratios fall as land size rises and some lenders cap the area they will value.
• Properties with significant defects, unapproved structures or incomplete building work.
• Properties affected by flood, bushfire or contamination overlays, where insurance may be difficult and resale restricted.

Because these are policy positions rather than valuation judgements, they differ markedly between institutions. A property declined by one lender is frequently acceptable to another, which is the practical reason to establish acceptability before signing a contract rather than after.

Valuations for equity release and removing a guarantor

Two situations require a borrower to seek a valuation deliberately rather than encounter one incidentally.

The first is releasing equity, whether for renovations, an investment deposit or another purpose. The amount available is the difference between the lender's valuation multiplied by the maximum ratio and the existing loan balance. A valuation 5 per cent below expectation reduces available equity by considerably more than 5 per cent, because the loan balance is subtracted after the multiplication. The home equity calculator illustrates the effect, and the guide to using home equity covers the wider considerations.

The second is releasing a guarantor. A limited security guarantee can usually be released once the loan falls to 80 per cent or less of the value of the purchased property alone, which requires a fresh valuation. Because families often set a target date for release, and because growth cannot be relied upon, it is worth requesting a valuation once the loan balance alone would achieve the ratio at a conservative value, rather than waiting for a figure that assumes the market has cooperated. The guide to guarantor home loans sets out the process.

Improving the outcome

A valuer forms a view in a short visit, and presentation matters more than most borrowers assume, though less than the underlying attributes of the property.

• Ensure the valuer has access to the whole property, including garages, outbuildings and any second dwelling. Anything not seen is generally not valued.
• Provide documentation for improvements: approved plans, occupancy certificates and invoices for structural work.
• Provide a short written list of recent settled comparable sales, with addresses and dates.
• Note anything the valuer cannot see, such as rewiring, restumping or a replaced roof.
• Complete unfinished work where practical, since a partly completed renovation is usually valued below both its start and finish states.
• Present the property tidily, which affects the assessment of condition.

What will not help is arguing about the figure without evidence, supplying listing prices rather than settled sales, or providing an automated online estimate. Valuers see these frequently and give them no weight.

A note on construction and off the plan

Where the property does not yet exist, the valuer assesses an on-completion value from plans, specifications and the building contract. Two risks follow: the on-completion value may be lower than the total of land plus build cost, particularly on high specification builds in modest areas, and the valuation is made at the outset while the market may move before completion. The guides to construction loans and off the plan purchases cover the consequences.

This article is general information and not personal or valuation advice. Valuation is a professional judgement and figures differ between valuers and between lenders. Borrowers who would like upfront valuations obtained from several lenders before an application is lodged may request a free assessment from an accredited broker.