Bank valuations vs market value: what's the difference?

This is because a lender valuation is based on the property's risks and how much they are willing to lend, while market valuation is simply the price someone is willing to pay in the current market. There are actually five main ways a property's value is gauged:

1. Bank valuation
2. Selling agent's price appraisal
3. The sale price
4. Local council valuation (for rates)
5. Vendor's wish price

In this context, the top three are generally most important. Generally, banks and lenders will value the property at the lower end of the scale because they want to protect themselves. If you stop making your repayments and they’re forced to sell the property to recover the money they’ve lent you, they want to be satisfied that they’ll be able to cover the debt, as well as extra expenses like real estate commissions and legal fees. If the home is in a risky, bushfire or flood-prone area, they were to cover their backsides should the insurer pay them out for a conservative amount.

Why do banks need to value a property?

The bank or lender needs to ensure that your home loan is not greater than the property value. For example, if you've qualified for an 80% loan-to-value ratio (LVR) home loan on a $500,000 property, the bank will lend you $400,000. 

A lender assumes some risk in giving you money, so it wants to ensure the property the mortgage is secured by is reasonably safe. This is because if you default on the home loan and the lender takes your home away, it wants to re-sell it in a relatively short timeframe and with minimal cost. The bank valuation is a calculation on what the institution could reasonably expect to recover from the sale.

Bank valuations aren't always evident to the borrower, so homebuyers may not always be enlightened as to how much their bank is willing to lend.

What goes into a bank or lender property valuation?

Different banks and lenders have different risk appetites and may give differing valuations on the same property.

They will use an independent valuation service to measure internal and external areas, measure the land size, shape and any zoning restrictions. They will also assess the interior such as the number of bedrooms, bathrooms, age of the building, fixtures, the plan and so on. 

Other potentially surprising external factors could include: proximity to power and transmission lines (fire risk and ugly), and high risk areas (flood or bushfire-prone).

A bank might also be more hesitant to front up big sums of cash for properties in postcodes with which they are already significantly exposed, or in higher-density areas. Like the old saying goes, don't put all your eggs in one basket.

At the end of the day, lending money for property is an investment risk for the bank as well.

What happens if the bank valuation is lower than the property price?

If the bank or lender deems the risk of a property higher, the borrower may need a bigger deposit to cover the shortfall between the valuation and the market price.

Banks and lenders tend to be conservative with their valuations, and in a hot property market, the end price either at an auction or private treaty could easily eclipse what the bank says. When this happens, your deposit could be in jeopardy and the entire purchase could be thrown a curveball as the bank may not lend you the amount needed.

If there's a gap between the advertised price or the agents' appraisal and the bank valuation, there's a few things you can do:

1. Challenge the valuation

Some banks and lenders let you challenge the valuation if you think it's too low. However it could be like talking to a brick wall. You will need to provide evidence to your claim, such as recent sales of comparable properties in the area. You may have a better argument if the valuer didn't do a full interior check of the property. This is the case if you think there are features on the interior that add significant value.

Some lenders eat the cost of the first valuation to get borrowers on board. However if you challenge the valuation, you may need to pay for the second round. Valuations typically cost around $200 to $600, or more for prestige properties.

2. Borrow more money, raise your LVR

If the valuation comes in at less than the home value, another option is applying to borrow more money with your current bank. You may be able to borrow up to 95% of the property's value i.e. 95% LVR or a 5% deposit.

However keep in mind if you have less than a 20% deposit you'll probably need to pay lenders mortgage insurance or LMI. Some lenders waive LMI if you have a 15% deposit - nevertheless LMI can add up to thousands or even tens of thousands of dollars. LMI is often rolled into your mortgage, meaning you are charged interest on that amount, too.

3. Apply to another lender

Applying with another lender could be a more successful avenue than coming to loggerheads with the original lender. There are more than 100 lenders in the Australian mortgage market. If you don't like what one is dishing out, you could always apply with another. Be aware that applying for multiple home loans and being knocked back from different lenders will likely show up on, and adversely affect, your credit report.

Different lenders have different appetite for risk, and have different exposures to the property market. A different lender might not mind so much that the home is next to power poles, wind farms or other unappealing landmarks. They might also have less exposure in the postcode you're buying. 

4. Tap into equity if you own another property

If you've owned another property for a while, chances are it has appreciated in value and you've accrued equity. If you are willing to put forth some equity in this home to fund another home purchase, your bank might be willing to lend more. 

If you're a first home buyer, you could ask the same but through a family member. They act as guarantor for the loan, however this comes with an entirely different subset of considerations - including how comfortable you are reaching out to 'The Bank of Mum and Dad'.

Bank valuations and auctions - know before you bid

Auctions can be intimidating to the uninitiated, especially because price guides cannot be provided, nor is the vendor's reserve price known. A selling agent can point you to recent sales of comparable properties in the area, but you'll still be in the dark a bit here, and you won't truly know until the hammer falls. 

• It's advisable you get pre-approval for a home loan so you're not bidding blindly. This lets you bid up to a certain amount, and you'll know when to tap-out.
• A typical marketing period of a home going to auction is four weeks. This gives you enough time to inspect the property, and get a bank valuation.

It's highly possible for an auction price to blow out wildly beyond what you and your bank thought the property was worth. In this way an auction can be considered the true gauge of the market - it's the coal face. Sales via auctions are unconditional, meaning you can't back out if you win, adding to the layer of intimidation. Doing the preparation before auction day is crucial.

This story was originally written in May 2011, and updated by Harrison Astbury in June 2022.

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