A property valuation is an important step in a home loan application process as it determines the value of the property you’re using as security. Since last year, the average house prices have gone down across all major cities except Canberra due to the changing housing market, which means that the valuation may well turn out to be lower than you've expected.
In fact, in a recent study, we asked over 1,100 Aussies what they are most concerned about when it comes to the mortgage process, and 40% are worried about getting a valuation that is too low1.
Lets take a closer look to understand the importance of property valuations and understand what options are available if your valuation comes back lower than you’ve expected.
|Change in dwelling values as at December 20182|
Why does a valuation matter?
Lenders use the valuation of a property to work out how much money they're willing to offer - as a percentage of a property's total value - known as the Loan to Value Ratio (LVR).
The amount of a deposit you have will also affect your LVR as lenders calculate your LVR by dividing the amount you need to borrow by the value of the property. The more of a deposit you have, the less you will need to borrow, thus your LVR will be smaller. An application with an LVR of 80% or more may be considered higher risk by a lender which effectively increase the interest rate lenders can offer. You can read more about LVR here.
When your property valuation comes in lower than you expected, you may have trouble borrowing the amount you’ve applied for. In some cases, it could also mean there is an additional risk of losing your deposit or property, but there are some things you can do to avoid this.
What can you do if your valuation comes back low?
If you think that your property valuation seems too low, get back in touch with your lender to get more information so you can understand why the number is lower than you expected. If you are still not satisfied with the outcome, you can choose to send a formal (written) objection to a valuation through the relevant government agencies in your state:
- New South Wales: https://valuation.property.nsw.gov.au/
- Victoria: https://www.propertyandlandtitles.vic.gov.au/valuation/council-valuations/objecting-to-a-council-valuation
- South Australia: https://www.sa.gov.au/topics/planning-and-property/owning-a-property/objecting-to-a-property-valuation
Alternatively, if the low valuation leaves you with a fund gap - called a valuation shortfall, consider the following options:
- Cover the shortfall difference if you can afford it.
- Consider looking for an alternative lender who can lend to you at a higher LVR. Depending on the situation the amount you might be able to borrow could be up to 95% of the property value - which could provide you with enough funds to cover the valuation shortfall.
Tip: To be valuation-savvy, do your research. Collect the last 3 to 6 months of house sales data from the area to have a basic sense of what property is worth. It doesn’t replace a formal valuation but it can help you to be realistic about your own home (we tend to overvalue what we own) and to make sure you don’t commit more money than a property is worth. Read more about different types of how valuations and how they work here.
Talk to us. At Pepper Money we have a comprehensive range of rates and loan product offerings that include a range of LVR options. We can help find the most suitable rate for your situation, and we make it really easy because we offer a one application process with multiple flexible solutions. Speak to us today on 13 73 77, or you can enquire online to find out if a Pepper Money loan might be the right answer for you.
This article provides you with factual information only, and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. Neither Pepper nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in this article. For information about whether a Pepper loan may be suitable for you, call Pepper on 13 73 77.