When applying for a home loan, your lender will commission an independent valuer to appraise your property. The valuation of the property is based on the state of the property as well as evidence of recent sales of similar properties in your area.
In recent months, MyRate Home Loans has seen a number of valuations coming in below borrower expectations, and in some cases, they even come in lower than the purchase price paid only weeks earlier.
- Uncertain property market and exposure to being sued makes valuers nervous
In today’s uncertain market, it is becoming more and more difficult to predict how much a property is worth amid ongoing speculation about a housing bubble and uncertain interest rates. As a result, valuers are becoming increasingly cautious and as such, are producing more conservative property valuation figures.
If valuers “get it wrong” they will often find themselves being sued by Lenders Mortgage Insurance companies who may be out of pocket after selling a property to recover funds lent on a loan that went bad.
Philip Western, National President of the Australian Property Institute explains that “we have a market where there is a very limited number of underwriters prepared to write cover to protect the valuation profession, and those that are prepared to insure valuers continue to look to placing severely limiting clauses in such policies “
As a consequence, many valuers may feel pressured to bring in lower valuations because they cannot risk being taken to court. Unfortunately borrowers are the “victims” of this situation.
- Borrowers bear the consequences of conservative valuations
A valuation figure will affect your Loan to Value Ratio (The loan amount divided by the property amount) and this in turn will determine whether you pay Lenders Mortgage Insurance (LMI). Lenders usually require Lenders Mortgage Insurance to be paid where the Loan to Value Ratio exceeds 80%. It protects them if the borrower defaults and the full loan amount cannot be recouped from selling the property.
The “value” of your property for the purposes of your home loan, is either the valuers valuation figure, or in the case of purchases (as opposed to refinanced properties), the property purchase price, whichever is lower.
Let’s take an example of a borrower who has just purchased a home for $500,000, has a deposit of $105,000 and whose home gets valued at only $480,000.
If we take into account the property purchase price, the LVR would be 79% and the borrower would not need to pay LMI.
However if the valuation figure prevails, the LVR would be 82%, which means that the borrower will have to pay Lenders Mortgage Insurance which would be approximately an extra $3,400.
In other cases, a lower valuation figure can spoil a deal altogether where it might compromise the home loan eligibility of borrowers. A low valuation figure may increase the LVR to above a level that a lender is willing to accept… typically lenders will not lend on an LVR of more than 95%.
- Unrealistic prices can mean risky business
Some lenders may accept the property purchase price as the acceptable value to calculate your LVR. That may seem great to a potential borrower but could result in borrowers owing more than a property is realistically worth – this is called “negative equity” and is a terrible situation to be in if you can no longer meet your home loan repayments.
Borrowers should consider this scenario when taking on a home loan and not simply borrow from a lender who offers the highest valuation.
MyRate reviews all borrower applications in line with responsible lending obligations and borrowers should make sure when they compare home loans that the lender they choose is registered with the Australian Securities and Investments Commission (ASIC) and that they do the same.