2019 is set to be a big year for property in Australia. Many people are wondering where exactly housing prices will be at the end of the year and if now is the time to buy, sell, hold or all of the above.
This article will certainly not speculate on that – but we will go into detail how the value of a property is calculated, and how that can impact your mortgage and the mortgage process.
There is a lot of click bait articles in the media, with little substance. Ignore those opinions and focus on quality data.https://www.corelogic.com.au/news – is a great resource for data around property values and trends.
What is a property estimate?
A property estimate is an online resource like www.onthehouse.com.au. You input the property address and it will pull in historical data to give you an estimated range of the property value.
If the property has had like for like properties that have sold, the range may be given with high confidence. Otherwise, the data from these reports can only be used as a basic guide.
Keep in mind that the objective of these online sites is to generate interest – so higher values are returned to entice website visitors to transact in real estate.
What is a real estate estimate?
A real estate estimate is when you engage in a local real estate agent to view and give an appraisal on the value of the property.
An experienced and honest real estate agent can give you an accurate estimate on the value of the property and local market conditions.
Local real estate agents will have a great knowledge of that area, and understand which properties are selling well and what properties are not moving.
Additionally they should be happy to provide comparative sales within the area, as part of the report. This can be an important resource, if you need to challenge a bank valuation (more on that later)
What is a bank valuation?
Simply put, a bank valuation is an independent opinion on the value of the security that the bank is looking to lend against. The primary function of home loans is the bank will take a mortgage over the title and secure the loan against the value of the property.
Below is the different types of valuations.
Automated Desktop Valuation
Allows the bank to perform a valuation based on property data via a computer-generated report. It considers similar like-for-like sales, borrower’s estimation, and suburb data to return a value. This type of valuation is more suitable for established properties, with 80% LVR purchases and refinances.
Contract Of Sale Valuation
This valuation allows the bank to accept the contract of sale as the basis for the valuation. This type of valuation will return the same value as the contract of sale.
A type of valuation report, where the valuer will drive past the security for valuation. This is suitable for complete properties, that attach lower security risk.
Full Valuation Report
The valuer will perform a full inspection of the security, taking photos and writing up a full report, on the property and local market conditions. They will then assess against the current market and like-for-like sales (using three settled sales in the last six months) in the area to give a final value of the security and conduct a risk assessment report.
The risk assessment report will comment on the local environment and the local real estate market.
As If Complete Valuation
This type of valuation is a full valuation report for a property that is not constructed yet. The valuer will assess the vacant land and review the proposed fixed build contract. They will then return an ‘as-if-complete’ valuation report, which is calculated as the value of the land and the deemed value of the fixed contract of build contract (this can be used for building single security or multiple securities).
The valuer will also compare to like-for-like sales in the area to support their findings. This type of valuation is used for land and build lending, which has a land and a fixed build contract component.
This type of valuation can cause valuation risk, particularly around the fixed build contract. The valuer can deem the included items to be unnecessary is generating value and can deem the build to be ‘over capitalised’ in value.
For example, the fixed build contract includes $20,000 in upgraded kitchen features, the valuer may deem that to be over capitalised and that value would not be recuperated on a free market. This can cause variations between the valuation report and the contract of sale and a shortfall for lending purposes.
What Happens If There Is A Shortfall On The Valuation?
Below is an example of when the valuation is below the contract of sale price. Due to the shortfall in the valuation the client has the following options:
- Contribute the additional funds to make up the shortfall at settlement, contributing $140,000 instead of $100,000
- Contribute additional equity at settlement. This could be using the equity in other properties the borrower owns or using the equity in the family property (using a security guarantee loan)
- Incur Lenders Mortgage Insurance (LMI) – generally, if the borrowing is over 80% LMI is charged by the bank and added to the loan. In the below example the new LVR has gone from 80% to 88% and the LMI premium is calculated on that new ratio.
|Transaction||Same Valuation||Shortfall Valuation|
|Contract Sale Price||$500,000||$500,000|
|Bank Approved Lend 80%||$400,000||$360,000|
What Is LVR?
Loan Value Ratio (LVR) is a calculation use to work out the percentage of borrowers and a proportion of the security value. Generally, lenders will allow an 80% LVR on properties before they start to charge Lenders Mortgage Insurance (LMI)
There are exceptions to that, based on the location, type of security and the type of borrower. The lender may reduce the maximum LVR allowed, for example 70%. In that case the borrower would need to contribute more towards the purchase (30% instead of 20%)
How does LMI work?
Lenders Mortgage Insurance (LMI) is a premium that the bank takes out on behalf of the borrower. The bank takes out the insurance premium once they deem the borrower to be risky (and a higher risk of defaulting on the mortgage).
The bank will have an internal policy that will dictate when ‘LMI’ is triggered. If LMI is incurred the policy will be payable by the borrower. The insurance policy is incremental, meaning the higher the LVR the higher the premium, for example the premium on a 93% LVR lend will be higher 87% LVR .
The policy is capitalised onto the base of the loan, which means the policy is not payable by the borrower at settlement, instead it is amortised over the life of the loan.
Generally an LMI policy is required for borrowings over 80%, but there are some exceptions.
Do I Need To Pay LMI?
Banks do have niche policies, that allow the borrowers to borrow a higher LVR and have the LMI waivered on the loan.
This is generally waivered for medical, accounting, legal, entertainment and sporting industries. These waivers can allow the borrower to go up to 90% LVR and have the LMI waivered.
Each lenders has different requirements to satisfy this type of waiver, so it is important to work with your hfinance mortgage broker – to see if you can qualify and potentially save thousands of dollars in LMI.
How Does A Bank Valuation Work If I am Using A Security Guarantee?
A security guarantee of a family pledge loan is when the primary borrowers use a family property as security (or equity) in lieu of a deposit – to purchase their first or new property. This is a type of finance that is quite common among first home buyers.
What are the implications if the purchasing property has a short valuation? Do the primary borrowers need to find additional money to contribute for the shortfall?
As the bank will take both the purchasing and family property as security, the borrowers can increase the second loan and take up additional equity to cover the difference. It is really important to ensure that there is sufficient equity available in the family property – in case this does happen. Banks are very strict on how much equity needs to be available in the family property – so if there is insufficient equity you may need to contribute cash towards the shortfall.
Not all valuations are the same and it is important to discuss this with your hfinance mortgage broker. It is also important to understand that the bank you have a conditional approval with, may not lend the full % of required funds for that propose security.
For example, some banks will lend a maximum of 80% for apartments in the Docklands and Abbotsford area in Melbourne. It is important to have this discussion to determine your best lending options.
This article was originally published: Read here