When buying a property, many people assume the purchase price and the property’s value are the same thing.
Often they are.
But sometimes the bank sees things differently.
Understanding the difference between the price you’ve agreed to pay and the value a lender places on the property can help you avoid unexpected delays, additional costs, or even a declined loan application.
What is a property value?
A property’s value is simply what someone is prepared to pay for it.
In a competitive market, buyers may be willing to pay more because demand is high.
In a quieter market, properties may sell for less.
The agreed purchase price reflects what a buyer and seller have negotiated on the day.
What is a bank valuation?
Before approving your home loan, the lender will usually arrange an independent valuation of the property.
The purpose of the valuation is to estimate what the property could reasonably sell for if the lender ever needed to recover the loan. More on that here.
Rather than focusing on emotion or competition, valuers consider factors such as:
- Recent comparable sales
- Location
- Land size
- Condition of the property
- Improvements and renovations
- Local market conditions
The valuation helps the lender assess the level of risk associated with the loan.
Why can the bank’s valuation be lower than the purchase price?
There are several reasons this can happen.
The market moved quickly
In a fast-moving property market, buyers may agree to pay more than recent comparable sales support.
Valuers generally rely on settled sales rather than current listings or auction results. Organisations such as CoreLogic provide property data and recent comparable sales that valuers commonly use as part of their assessment.
High buyer demand
Sometimes buyers are prepared to pay a premium because they particularly want a property.
While that may make sense personally, the bank is assessing the property’s market value rather than its emotional value.
Limited comparable sales
Unique properties or homes in smaller regional areas can be more difficult to value because there are fewer recent sales to compare.
Conservative lending approach
Different lenders may apply different valuation methods or use different valuation firms.
As a result, two banks may place different values on exactly the same property.
What happens if the bank values the property lower?
A lower valuation can affect how much the bank is prepared to lend.
For example:
Purchase price: $800,000
Bank valuation: $760,000
If you planned to borrow 80% of the purchase price, the bank may instead lend 80% of the lower valuation.
This could mean you need to contribute a larger deposit or review your finance options. A lower valuation may also affect your Loan to Value Ratio (LVR), which can influence whether Lenders Mortgage Insurance (LMI) is required.
Can I challenge a bank valuation?
Sometimes.
If there is strong evidence that the valuation is inaccurate, your broker or lender may be able to request a review.
This usually involves providing:
- Recent comparable sales
- Information about renovations or improvements
- Other supporting market evidence
However, lenders are not required to change a valuation, and the outcome will depend on the circumstances. Each lender has its own valuation process, so speaking with your lender or mortgage broker about the next steps is usually the best place to start.
How can a mortgage broker help?
An experienced mortgage broker understands that different lenders can take different approaches to valuations.
If one lender’s valuation affects your borrowing capacity, another lender may assess the property differently.
More importantly, a broker can help you understand how the valuation affects your overall borrowing strategy before it becomes a problem.
Looking at the bigger picture
A bank valuation is not a judgement about whether you’ve made a good purchase.
It is simply one part of the lender’s risk assessment.
At You First, we help clients understand how lending decisions fit within their broader financial plan, so there are fewer surprises along the way.
If you’re buying a property and would like clarity around your borrowing options, we’re always happy to have a conversation.
The information in this article was accurate at the time of publication and is intended as general information only. It does not take into account your personal objectives, financial situation or needs. Laws, regulations and lending policies may change over time, so you should seek professional advice before making financial decisions.