When you're deciding which property is right for you, the price is one of the many factors you need to consider.
The list price – the price tag the real estate agency places on the property – is just that: a price tag. The list price can be influenced by many factors, including the vendor’s motivation to sell.
They may want a quick sale – maybe they need the cash, perhaps it's a deceased estate that they want to deal with quickly.
Alternatively, they may need to get to a certain price to move somewhere else – in that instance the price may be inflated.
Regardless of the motivation of the seller, however, your lender will also value the property – after the price has been agreed and the contract has been signed.
It’s wise to keep this in mind – if the price you agree to pay for a property seems out of kilter with the local property market at that point in time, your lender may not approve your home loan application.
What is a lender’s valuation?
Essentially, your lender needs to be confident the money they’re lending is for an asset of equivalent or greater value to the money you’re borrowing.
“Your lender needs to make sure that the loan and the security, the property in this instance, are in sync,” says Carolyn Bray, Head of Credit at Macquarie’s Banking and Financial Services Group.
“So if the loan defaults the property can still be sold to cover the value of the loan.”
The lender’s valuation may differ from a real estate agent's appraisal.
“Real estate agencies will often list at the highest realistic market price,” says Bray.
“They’ll base it on recent sales in the area and what they anticipate it will go for, but they tend to be on the optimistic side.
“A lender’s valuation may be more conservative. A lender will also look at the value of comparable recent sales, but it’s not about the maximum market price, it’s looking at a realistic price.”
How does the valuation of a property affect the amount you’ve been pre-approved for?
Pre-approval is the theoretical amount of money the lender is willing to lend you, based on what you’ve told them.
A lender may be willing to lend you $400,000, but it won’t typically lend more than 80% of the value of the property without charging for mortgage insurance.
If the agreed property purchase price makes sense, and is in line with the local market, then the mortgage application will usually progress without an issue, as long as the applicant(s)’s financial status meets the lending criteria.
If the agreed sale price seems inflated, however, the lender will review the amount of money it’s willing to lend you for that property.
For some property types, for example, small apartments, or rural properties, your lender might have a lower – or in some cases no – appetite. They may only be willing to lend 70% or 60% of the property value.
So, just because you’ve been pre-approved for a certain amount, it doesn’t mean the lender is guaranteeing you’ll be able to access those funds to buy any property you like.
How do lenders assess a property’s valuation?
If the purchase is completed via a typical open market transaction, involving an agent, a listing via usual portals, and is comparable to available recent sales, then the valuer is highly likely to take the view that the purchase price represents fair market value.
However, if it seems inflated, they will look more deeply.
“There are many methods that can be used to assess a property’s value,” says Bray.
“Valuers may go out and inspect the property – they'll look at the size, the condition, they'll look at the area the property’s in and any development plans in the area. They'll also look at similar sales nearby to get a handle on what other properties have gone for.”
Is it likely that my lender will value the property lower than the purchase price?
On some occasions, a valuation may come back lower than purchase price. If this happens, it indicates the valuer’s view that the purchaser has overpaid for the property.
This is more common where there has been a time-lag between the purchase being made and the valuation being completed, for example, for an off-the-plan apartment. In this instance, there can be a number of years between the sale agreement and development completion, and market conditions may have changed.
The lender will lend against the lower of the purchase price and the valuation amount. If you pay $500,000 for a property but the valuer thinks it is worth $450,000, the bank will lend you 80% of $450,000, rather than 80% of $500,000 – making it imperative that you have a solid picture of the valuation of the property, and have researched what is predicted to happen in the property market over coming years.
How can buyers find the market value of a property?
Before you enter negotiations to purchase a property, it’s smart to have a good idea of the market value.
“If you're a buyer, there are so many ways you can get an indication of what the property may actually be worth,” says Bray.
“Go to Domain and realestate.com.au, these sites will give you an idea of recent sales in the area. There are also reports available, and you can speak with your mortgage broker and local real estate agents to get a better picture.”
It’s wise to do so – not only to ensure your lender values the property in line with the purchase price, but to also protect you from paying an inflated price for the property.
- The list price of a property is typically at the top end of what the vendor is happy to sell for.
- The market valuation is what the property is estimated to be worth, based on a realistic assessment of current market conditions.
- Research other comparable property sales nearby over the past 3-6 months for an idea of what the market value is.
- Just because you’ve been pre-approved for a certain amount doesn’t mean the lender will let you borrow that amount for any property – the property must meet the lender’s valuation criteria.
Want to know more about home loan pre-approvals or valuations? Call 13 62 27 and speak with one of our lending specialists today.