Top Strategies to Prepare for a Home Loan Valuation

A lender's valuation can change how much you are able to borrow. Knowing how it works before you apply puts you in a stronger position.

If you are buying or refinancing in Ringwood, the valuation is one of the last hurdles in a home loan application. It is also one that many people only hear about when something goes wrong. This article explains what the valuation is for, what happens when it comes in low, and what you can do ahead of time.

What Is a Home Loan Property Valuation?

A home loan property valuation is the lender's estimate of what a property is worth. The lender uses it to decide how much risk it carries if it lends against that property.

The valuation is for the lender, not for you. It may differ from the contract price, from an agent's appraisal, or from what a neighbour's home sold for. Lenders use different methods. Some rely on a desktop assessment using sales data, while others send a valuer to inspect the property. Which method applies depends on the lender and your situation.

It also matters for your pre-approval. Home loan pre-approval is generally conditional, and the lender will usually still value the actual property before giving final approval.

How a Low Valuation Changes Your LVR

If a valuation comes in below the purchase price, your loan to value ratio (LVR) rises, and you may need to put in more cash or change your loan amount. LVR is your loan divided by the property's value as the lender sees it.

Consider a buyer in Ringwood who signs a contract and has saved a 20% deposit. They apply for a loan of 80% of the contract price. The lender's valuer then values the property at 5% below the price. The same loan is now about 84% of the valuation, which is above the 80% line many lenders use as a key threshold.

The buyer has a few choices. They could ask the lender to reconsider the valuation, supplying recent comparable sales. They could also reduce the loan to 76% of the contract price, which is 80% of the valuation. That means finding extra cash equal to 4% of the price. Or they could stay at the higher LVR and accept that Lenders Mortgage Insurance (LMI) may apply, depending on the lender. Each option has a cost. Extra cash reduces savings, and LMI adds to what you pay.

In this scenario, the buyer's broker sent the lender recent sales of similar homes nearby and asked for a review. The lender kept the valuation as it was. The buyer then used a small amount of extra savings to cut the loan, which kept the LVR at 80% of the valuation and avoided LMI. The outcome was a smaller loan and a lower cash buffer, but no insurance premium.

Strategies to Prepare Your Property for a Valuation

The most useful preparation is to present the property well and give the valuer evidence of its value. You cannot control the final number, but you can reduce avoidable surprises.

If you own the property, such as when refinancing, these steps help:

• Tidy the property, fix visible maintenance issues, and make sure the valuer can access every room.
• Keep a record of renovations with dates and invoices, because the valuer may not see work hidden behind walls.
• Gather recent sales of comparable properties in your suburb and the surrounding area, to hand over if the valuer asks.

If you are buying, you have less control. Ask your broker before you sign the contract how your chosen lender tends to value that kind of property, and whether it will accept a review. It also helps to hold a small buffer beyond your deposit, in case the valuation falls short.

Why Your Borrowing Capacity and Valuation Are Separate Checks

Borrowing capacity and valuation are two different tests, and you need to pass both. Capacity looks at your income, expenses and debts. The valuation looks at the property.

You can have strong capacity and still face a smaller loan if the property is valued lower than expected. The reverse also holds. A high valuation does not raise your capacity if your income and commitments limit what a lender will offer. You can get a sense of your position using our borrowing capacity page, then test repayments with the mortgage repayment calculator. Calculators give estimates only, and the result depends on the rate and terms you choose.

Can a Higher Valuation Help You Build Equity?

A higher valuation can increase your usable equity, but only if a lender agrees and the numbers suit your situation. Equity is the gap between your property's value and what you owe.

When homeowners refinance, the lender values the property again. If the value has risen since purchase and your loan has come down, your LVR may fall. That can open up more loan options, and some lenders offer a rate discount at lower LVRs. The trade-off is that borrowing against equity increases your debt, and refinancing can involve exit and setup costs. It is worth comparing rates and fees together rather than looking at the rate alone.

Our home loans page outlines the types of loans we can compare for you across lenders.

Working with a Local Broker Before the Valuation

Talking to a broker before you apply gives you time to plan for a valuation that falls short. We can explain how different lenders approach valuations, and which options suit your deposit and goals.

If you are in the Ringwood area, our Ringwood mortgage broker team can walk you through your situation in plain English.

Call one of our team or book an appointment at a time that works for you, and we will help you prepare for your valuation before it becomes a problem.

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