What happens when the bank valuation is lower than the purchase price, or the price you have offered? For more info
For home loan enquiries
jayden.vecchio@huntergalloway.com.au
Find Jayden here:
T: 1300 088 065
E: hello@huntergalloway.com.au
Hunter Galloway: Mortgage Broker Brisbane
Head Office: 3 Latrobe Tce Paddington QLD 4064
PO Box 841, Paddington QLD 4064
CBD Office: Level 20, 300 Queen Street Brisbane, QLD 4000
Hunter Galloway are an Award Winning Mortgage Broker based in Brisbane. We help clients from our local area, Australia, and all over the world. We believe buying a home should be stress-free and uncomplicated, and we will work for you to make your dreams become a reality.
Next steps and settling your first home
Our team here at Hunter Galloway is here to help you buy a home in Brisbane. Nathan & Joshua Vecchio are Senior Mortgage brokers who specialise in making your home journey easy.
Unlike other mortgage brokers who are just one person operators, we have an entire team of experts to help make your home loan journey as simple as possible.
If you want to get started, please get in touch and we can book a time that suits you – either a phone call information session or a face to face meeting (which doesn’t cost anything for you).
When you buy a property you might assume you’ve paid market value for it. More often than not you’d be right.
But in some cases your mortgage lender may value the property at less than the purchase price. Here’s an explanation of why this occurs and what to do if it happens to you.
The bank valuation
Let’s say you’ve bought your first home and now want to finalise your loan. Before the lender offers you unconditional approval they may send an independent professional to value the property.
Lenders do this because they use your property as security for the loan. In other words, if you default on your loan, the lender has the right to sell the property to recover the outstanding loan amount.
Sometimes the valuer may estimate the market value of the property is lower than the purchase price. Let’s look more closely at some scenarios where this may happen.
Off-the-plan apartments
If you’re buying an off-the-plan apartment, it’s a good idea to remember that the lender is only able to value the finished property. Completion may be well over a year after you sign the contract and place a deposit.
There is a risk that property values in the area may change over the construction period. If they do, the bank valuation may be lower than your purchase price.
There is also a risk that the dimensions of the finished apartment may vary from the plans. This situation may result in a bank valuation that’s less than the purchase price.
Buying unregistered land
A similar situation may occur in new estates when developers offer unregistered land for sale. It may take several years for the developer to build the infrastructure necessary to register the land.
In this case, the lender will need to reassess your application before settlement. Over the time since you paid your deposit, values in the area may have changed, resulting in a valuation lower than your purchase price.
If you’d like to know more about what to consider when buying land, we have an article that looks at this subject in more detail.
What if the lender’s valuation is lower than the purchase price?
As we mentioned earlier, the lender values your property to see whether it provides enough security against the loan amount. To help assess their risk, lenders use a measure called the loan-to-value ratio (LVR).
Many lenders will not lend if the LVR is more than 95%. And if the LVR is more than 80% they will ask you to pay Lenders Mortgage Insurance (LMI).
Here are some examples of what could happen if a lender’s valuation affects your LVR:
The LVR is still below 80%
Your purchase price is $500,000.
You need to borrow $300,000.
The lender’s valuation is $450,000.
LVR is 300,000 / 450,000 = 67%.
In this case the loan application would still go ahead and you wouldn’t have to pay LMI.
The LVR is over 80%
Your purchase price is $600,000.
You need to borrow $420,000.
The lender’s valuation is $500,000.
LVR is 420,000/500,000 = 84%.
The loan may still go ahead but you will have to pay LMI. You could add the LMI cost to your loan if you have the income to service the larger loan amount.
To sum up
The purchase price and the bank valuation might be different.
The bank valuation is used to calculate your LVR.
0 Comments