Property Valuations Explained: What Home Buyers Need to Know

Property Valuations Explained

A property valuation is an important part of many home loan applications.

Whether you are purchasing a home, refinancing an existing loan, accessing equity or buying an investment property, the lender may need to confirm the value of the property being offered as security.

The valuation can affect:

• How much you can borrow

• The deposit or equity required

• Your loan-to-value ratio

• Whether lenders mortgage insurance applies

• The interest rate or loan options available

• Whether the property is acceptable to the lender

Understanding how property valuations work can help you prepare for the home loan process and know what to expect if the valuation differs from the purchase price or your estimated property value.

What Is a Property Valuation?

A property valuation is an assessment of a property’s estimated market value at a particular point in time.

For a home loan application, the valuation is generally used to help the lender determine:

• Whether the property is suitable security for the loan

• How much the lender may be prepared to lend

• The loan-to-value ratio

• Whether additional lending conditions are required

• Whether lenders mortgage insurance may apply

The lender is primarily concerned with the value and saleability of the property if it ever needed to recover the outstanding loan.

A lending valuation may therefore be more conservative than the price a buyer is prepared to pay.

Why Do Lenders Require Property Valuations?

A home loan is usually secured against the property being purchased or refinanced.

Before approving the loan, the lender may need to confirm that the property provides sufficient security for the amount being borrowed.

For example, if you apply for an $800,000 loan against a property believed to be worth $1 million, the lender will calculate the loan-to-value ratio using the property value it accepts.

If the valuation confirms a value of $1 million, the loan-to-value ratio would be 80%.

However, if the accepted valuation is only $900,000, the loan-to-value ratio would increase to approximately 88.9%.

This difference could affect:

• The required deposit

• Lenders mortgage insurance

• Available loan products

• Interest-rate pricing

• Whether the application remains within lending policy

What Is a Loan-to-Value Ratio?

The loan-to-value ratio, commonly called the LVR, compares the loan amount with the lender’s accepted value of the property.

It is calculated using the following formula:

Loan amount ÷ property value × 100 = LVR

For example:

• Loan amount: $640,000

• Property value: $800,000

• LVR: 80%

The higher the LVR, the greater the lender’s potential exposure if the borrower cannot repay the loan and the property needs to be sold.

Higher-LVR applications may involve:

• Lenders mortgage insurance

• Stricter lending requirements

• Additional assessment

• Different interest rates

• Restrictions on certain properties

• A requirement for a larger deposit

Is a Property Valuation the Same as a Real Estate Appraisal?

No. A lender’s property valuation and a real estate agent’s appraisal serve different purposes.

Real estate appraisal

A real estate appraisal is generally prepared by an agent to estimate the price a property may achieve in the current market.

It may be influenced by:

• Recent comparable sales

• Buyer demand

• Current listings

• Local market conditions

• The agent’s knowledge of interested buyers

• The proposed sales strategy

An appraisal can be useful for deciding on a listing price, but it may not be accepted by a lender as a formal property valuation.

Lender valuation

A lender valuation is completed for mortgage-security purposes.

It may take a more conservative approach and consider:

• Recent settled sales

• Property condition

• Land and building details

• Location

• Marketability

• Zoning and title issues

• Environmental risks

• Restrictions affecting the property

• The likely sale value within a reasonable period

The lender will usually rely on its own approved valuation rather than an appraisal supplied by the borrower or selling agent.

What Types of Property Valuations Are Used?

Not every property requires a physical inspection.

The type of valuation used will depend on the property, application, available data and level of risk.

Automated Valuation

An automated valuation uses property data and statistical modelling to estimate the property’s value.

It may consider:

• Recent sales in the area

• Land size

• Property type

• Previous transaction history

• Available market data

• Comparable properties

Automated valuations can often be completed quickly because no physical inspection is required.

They are more likely to be suitable where:

• The property is in a well-established area

• There are enough comparable sales

• The property is relatively standard

• The requested loan is within acceptable limits

• The property details can be confirmed electronically

An automated valuation may not be available for unusual, newly built, rural or specialised properties.

Desktop Valuation

A desktop valuation is completed by reviewing property data without physically inspecting the property.

The valuer may consider:

• Recent comparable sales

• Online property records

• Available photographs

• Land and building details

• Location

• Previous sales history

• Current market conditions

A desktop valuation may be used where an automated estimate is not sufficient but a physical inspection is not considered necessary.

Kerbside Valuation

A kerbside valuation involves an external inspection of the property.

The valuer may view the property from the street while also reviewing available sales and property data.

This approach can help confirm:

• The property exists

• Its external appearance

• Its location and surrounding area

• Whether the available records appear consistent with the property

The valuer does not normally inspect the interior during a kerbside valuation.

Full Property Valuation

A full valuation involves a physical inspection of the property, including its interior and exterior.

The valuer may assess:

• Overall condition

• Building size and layout

• Quality of construction

• Renovations and improvements

• Land size

• Number of bedrooms and bathrooms

• Parking

• Views and location

• Comparable sales

• Any issues affecting value or marketability

A full valuation may be required for:

• High-value lending

• Unusual properties

• Rural properties

• Construction loans

• Properties with limited comparable sales

• Applications involving a high LVR

• Properties requiring significant repairs

• Situations where an earlier valuation was inconclusive

How Long Does a Property Valuation Take?

An automated valuation may be completed shortly after the property details are entered.

A physical valuation may take several business days, depending on:

• The property’s location

• Valuer availability

• Whether access is required

• Whether the property is tenanted

• The type of property

• The availability of comparable sales

• Whether additional information is needed

Delays can occur where the valuer cannot contact the owner, tenant or real estate agent to arrange access.

Providing accurate contact details and responding promptly to access requests can help keep the application progressing.

What Does a Property Valuer Look At?

The valuer will generally consider the property itself, its location and recent market evidence.

Property characteristics

These may include:

• Property type

• Land size

• Building size

• Number of bedrooms

• Number of bathrooms

• Garaging and parking

• Layout

• Age

• Construction materials

• Condition

• Renovations

• Outdoor areas

• Additional buildings

Location

The valuation may be affected by:

• Proximity to schools

• Public transport

• Shops and services

• Employment centres

• Parks and recreational facilities

• Main roads

• Industrial areas

• Flood or bushfire exposure

• Neighbourhood demand

Two similar homes may have different values because of their exact location, street position or surrounding development.

Comparable sales

Recent settled sales are an important part of the valuation process.

The valuer may compare the property with similar properties that have recently sold in the same or nearby areas.

Relevant differences may include:

• Land size

• Building size

• Condition

• Renovations

• Views

• Parking

• Property type

• Location

• Date of sale

Current listings may provide additional market context, but settled sales generally offer stronger evidence of what buyers have recently paid.

Property condition

A poorly maintained property may be valued below a similar property that is in good condition.

Issues that may affect the valuation include:

• Structural damage

• Incomplete renovations

• Water damage

• Significant maintenance requirements

• Unapproved building work

• Termite damage

• Poor access

• Safety concerns

• Extensive deterioration

A valuation is not the same as a building and pest inspection. Buyers should still arrange independent inspections where appropriate.

Zoning and title

The valuer may review issues such as:

• Property zoning

• Easements

• Encumbrances

• Access arrangements

• Restrictive covenants

• Multiple dwellings

• Leasehold interests

• Strata or community title

• Commercial use

• Unapproved improvements

Certain title or zoning arrangements may affect the property’s value or its acceptability as security.

What Can Affect a Property Valuation?

Several factors may cause a valuation to be higher or lower than expected.

Market conditions

Property values can change when buyer demand, supply, interest rates or economic conditions change.

A sale from several months earlier may not accurately reflect current conditions.

Limited comparable sales

If few similar properties have recently sold, it can be more difficult to establish a reliable value.

This is common with:

• Rural homes

• Prestige properties

• Unique architecture

• Specialist accommodation

• Properties on very large blocks

• Mixed-use properties

Property presentation

Presentation alone may not dramatically change the valuation, but the overall condition and quality of improvements can affect the result.

Cosmetic styling may appeal to buyers, while the valuer will also consider the underlying property characteristics.

Renovations

Renovations do not always increase the value by the amount spent.

The impact will depend on:

• Quality of the work

• Whether approvals were obtained

• Buyer demand

• The type of improvement

• Whether the renovation is appropriate for the area

• Whether the work is complete

Property type

Some property types may be considered more difficult to sell or finance.

Examples may include:

• Very small apartments

• Serviced apartments

• Studio units

• Properties in company-title developments

• Rural properties

• Specialist accommodation

• Student accommodation

• Properties with extensive commercial use

• Properties affected by significant defects

The lender’s acceptance of a property is separate from the value placed on it.

A property may have value but still fall outside a lender’s security requirements.

What Happens if the Valuation Matches the Purchase Price?

If the valuation supports the purchase price, the application can generally continue based on the proposed loan structure, subject to the remaining credit requirements.

The lender will still need to assess:

• Your income

• Expenses

• Existing debts

• Credit history

• Deposit

• Funds required for settlement

• The overall affordability of the loan

A satisfactory valuation does not guarantee approval, but it removes one important condition from the assessment process.

What Happens if the Valuation Is Higher Than the Purchase Price?

When purchasing a property, lenders will commonly calculate the LVR using the lower of:

• The purchase price

• The accepted valuation

This means a higher valuation may not automatically allow you to borrow more or contribute a smaller deposit.

For example, if you agree to purchase a property for $700,000 and the valuation is $730,000, the lender may still base its calculation on the $700,000 purchase price.

Different rules may apply for:

• Related-party purchases

• Property transfers

• Refinancing

• Equity releases

• Construction lending

• Properties purchased below market value

Your mortgage broker can explain how the accepted value will apply to your transaction.

What Happens if the Valuation Is Lower Than the Purchase Price?

A low valuation occurs when the lender’s accepted value is below the agreed purchase price.

For example:

• Purchase price: $800,000

• Lender valuation: $750,000

• Proposed loan: $640,000

Although the proposed loan represents 80% of the purchase price, it represents approximately 85.3% of the valuation.

This may affect the application by:

• Increasing the LVR

• Increasing the deposit required

• Triggering lenders mortgage insurance

• Changing the available interest rate

• Reducing the approved loan amount

• Requiring further credit assessment

What Are Your Options After a Low Valuation?

The available options will depend on your finances, contract and lender requirements.

Contribute more money

You may be able to proceed by increasing your deposit or using additional available funds.

Make sure you still have enough money to cover:

• Transfer duty

• Legal fees

• Registration costs

• Building and pest inspections

• Insurance

• Settlement adjustments

• Emergency savings

Renegotiate the purchase price

You may be able to discuss the valuation with the selling agent and negotiate a lower price.

Whether the seller agrees will depend on the contract, market conditions and other buyer interest.

Request a valuation review

A valuation review may be considered where there is strong evidence that relevant information was missed.

Supporting evidence may include:

• More recent comparable sales

• Incorrect property details

• Renovations not considered

• An incorrect land size

• Missing bedrooms, bathrooms or improvements

• A factual error in the report

A review is not guaranteed to change the result.

An asking price, agent appraisal or the buyer’s personal opinion may not be enough to support a higher value.

Consider another suitable lender

Different lenders may use different valuation providers or assessment methods.

However, there is no guarantee another valuation will be higher.

Repeated applications can also create additional credit enquiries, so any alternative should be considered carefully with your mortgage broker.

Reconsider the purchase

A low valuation may indicate that the agreed price is above the available market evidence.

Before proceeding, consider obtaining legal and professional advice and reviewing whether the property still suits your goals and budget.

Property Valuations for Refinancing

When refinancing, the lender may value the property to determine your available equity and LVR.

The valuation can affect:

• The maximum refinance amount

• Whether you can consolidate debts

• Whether cash out is available

• The interest rate offered

• Whether lenders mortgage insurance applies

• Whether an existing guarantee can be released

For example, if your property is valued at $900,000 and your existing loan is $540,000, the current LVR is 60%.

If the property is valued at only $800,000, the LVR becomes 67.5%.

You still have equity, but the amount available for additional borrowing may be lower than expected.

Property Valuations for Equity Release

Equity is the difference between the value of your property and the amount owing against it.

However, lenders may not allow you to borrow the full amount of your equity.

For example:

• Property value: $1 million

• Existing loan: $600,000

• Total equity: $400,000

If the lender allows borrowing up to 80% of the property value, the maximum total lending may be $800,000.

This would provide up to $200,000 of potentially usable equity before allowing for:

• Borrowing capacity

• Fees and costs

• Lending policy

• The purpose of the funds

• Other financial commitments

A higher valuation does not automatically mean you can borrow more. Your income and overall financial position must still support the proposed repayments.

Property Valuations for Construction Loans

Construction valuations differ from standard established-property valuations.

The valuer may assess:

• The current land value

• Building plans

• The fixed-price building contract

• Specifications

• Inclusions

• Site costs

• The estimated value when completed

The completed value may not equal the total amount spent on the land and construction.

Some expenses may not add the same amount to the market value, including:

• Premium finishes

• Landscaping

• Pools

• Demolition

• Site preparation

• Upgrades that exceed local buyer expectations

If the completed valuation is lower than the total project cost, you may need to contribute additional funds.

The lender may also require progress inspections throughout construction before releasing each payment to the builder.

Property Valuations for Investment Properties

Investment-property valuations may include an estimate of expected rental income.

The valuer may consider:

• Current tenancy arrangements

• Comparable rental properties

• Local vacancy rates

• Property condition

• Location

• Market demand

The rental estimate may be used as part of the lender’s borrowing-capacity assessment.

However, the lender may only use a portion of the rent to allow for potential vacancies and property expenses.

How Can You Prepare for a Physical Valuation?

You do not usually need to complete major work before a valuation, but the property should be accessible and reasonably presented.

Helpful steps may include:

• Ensure every room can be accessed

• Complete minor unfinished repairs where practical

• Provide details of recent renovations

• Have council approvals available for major improvements

• Make sure outdoor areas can be inspected

• Advise the valuer of additional features

• Provide access to garages, sheds and secondary dwellings

• Ensure the property details are accurate

Cleaning and presentation may create a better overall impression, but the valuation will primarily depend on the property’s features, condition, location and comparable sales.

Common Property Valuation Mistakes

Assuming the purchase price guarantees the value

The amount agreed between the buyer and seller does not require the lender’s valuer to reach the same conclusion.

Relying only on an online estimate

Online estimates can be useful guides, but they may not reflect renovations, condition, views, exact location or unusual property features.

Treating an agent appraisal as a lender valuation

An agent’s appraisal is prepared for a different purpose and may use a different approach.

Assuming every renovation adds equal value

The cost of an improvement does not always equal the increase in market value.

Making an offer without allowing for finance

A finance condition may provide important protection while the lender completes its assessment and valuation.

Obtain legal advice before signing a contract.

Spending all available savings

If the valuation is lower than expected, additional funds may be required. Maintaining an appropriate financial buffer can provide more flexibility.

Frequently Asked Questions

Does every home loan require a valuation?

Not necessarily. Some applications may be assessed using an automated valuation or existing acceptable data. Other applications require a desktop or physical valuation.

Who pays for the property valuation?

This depends on the lender and application. Some valuations are completed without a direct charge, while others may involve a fee.

Does a clean home increase the valuation?

General presentation may help the valuer inspect the property, but the result is primarily based on factors such as location, land, building characteristics, condition and comparable sales.

Can the lender value a property below the purchase price?

Yes. The accepted valuation may be below the price agreed between the buyer and seller.

Can a low valuation cause a home loan to be declined?

It can affect the maximum loan amount or cause the application to fall outside lending requirements. In some cases, the application may still proceed with a larger deposit or revised loan structure.

Can I choose the property valuer?

The lender generally appoints a valuer from its approved panel. Borrowers usually cannot select their preferred valuer.

Can two valuations be different?

Yes. Valuation is a professional estimate based on available evidence. Different valuers or assessment methods may produce different results.

Does a high valuation guarantee I can borrow more?

No. The loan amount will also depend on your income, expenses, debts, credit history and the purpose of the borrowing.

Is a property valuation the same as a building inspection?

No. A valuation estimates the property’s market value for lending purposes. A building and pest inspection focuses on the property’s physical condition and possible defects.

How long is a valuation valid?

The accepted period varies according to the lender, property and application. A new valuation may be required if the application or settlement is delayed.

Understand Your Property Valuation With Mortgage Matrix

A property valuation can play an important role in determining your deposit, available equity, loan-to-value ratio and home loan options.

At Mortgage Matrix, we help clients understand the valuation process, prepare their home loan applications and consider their options when a valuation differs from expectations.

Whether you are purchasing a home, refinancing, investing, building or accessing equity, our mortgage brokers can help explain how the property value may affect your application.

Book an obligation-free appointment with Mortgage Matrix to discuss your borrowing capacity and home loan options.

This information is general in nature and does not take into account your personal objectives, financial situation or needs. Lending criteria, valuation methods, property requirements, interest rates and fees vary and are subject to change. Property values and home loan approval are not guaranteed.