How does a bank valuation impact borrowing?

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​When you purchase a property with finance, the lender will typically order a bank valuation to help them ascertain the loan to value ratio (LVR) of your home loan. For new home buyers, this might be something that you’ve never thought about before, but the outcome of the bank valuation could have big implications for your home loan.
 
How does a bank valuation work? 
When you purchase a property that is subject to finance, the bank will order a valuation of the property through an independent valuer. The independent valuer will use a certain method to estimate the true value of the property.
 
A valuer could use a desktop valuation, where they estimate the property’s value based on comparable sales and never visit the actual property. Alternatively, they would do what is known as a kerbside valuation, where they will attend the property and look at it from the exterior to do their valuation.
 
The most common form of valuation is the full valuation, which involves the valuer attending the property and looking through it. They then formulate their valuation based on comparable sales of the other properties.
 
When the bank has the independent valuation, they use this figure to calculate the borrower’s LVR.
 
How does the bank valuation impact borrowing? 
When applying for a loan with a lender, a bank will normally want to see the borrower has a 20% deposit. This gives them a level of security in the event of a property price fall, or if the borrower defaults on their loan.
 
Borrowers can obtain higher LVR loans, however, they normally come with Lenders Mortgage Insurance (LMI). There are also other programs in place such as the FHLDS or specialist loans (like guarantor loans) that can help first homebuyers who need to take out higher LVR loans.
 
If a bank valuation comes in lower than the price you paid for a property, then you could find yourself in a situation where you have to make up the difference to ensure you are keeping within the LVR required by the lender. That could mean needing a higher deposit or looking at other options such as paying Lenders Mortgage Insurance (LMI). Both of which could cost tens of thousands of dollars.

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