Property Valuation in Australia: How Banks Value Your Home and Why It Matters

When you apply for a home loan, your lender does not simply take your word for what the property is worth. They commission an independent valuation to determine how much security they are actually getting for your loan. This valuation can have a significant effect on your application outcome, your LVR, your rate and, in some cases, whether the deal proceeds at all.

Why Lenders Order Valuations

The property is the lender's security. If you default and they need to sell it to recover their funds, the valuation is their estimate of what they can expect to get in a reasonable sale timeframe. Lenders need to be confident that the property is worth at least as much as they are lending.

Because the purchase price and the market value can sometimes diverge, particularly in auction markets where emotional bidding can push prices above fair value, lenders do not rely on the purchase price alone. They require an independent professional assessment.

Types of Valuations

Lenders use several approaches to valuation, and the type used for your loan depends on the loan size, LVR and lender preference.

Full Valuation

A registered valuer physically inspects the property inside and out, takes measurements and photographs, researches comparable sales in the area and produces a written report with a formal valuation figure. This is the most thorough and most reliable type. It is typically required for higher-value loans, higher LVR applications or unusual property types.

A full valuation typically costs $300 to $600, usually charged to the borrower though some lenders absorb this cost.

Desktop Valuation (Automated Valuation Model)

Many lenders now use automated valuation models (AVMs) for straightforward, well-established properties with good comparable sales data. An AVM uses algorithms and property database information to estimate value without a physical inspection. It is faster and cheaper than a full valuation.

AVMs are generally reliable for standard properties in established suburbs. They are less reliable for unique properties, rural locations, properties with significant improvements or areas with thin sales data.

Kerbside Valuation

Partway between a full inspection and a desktop, a kerbside valuation involves the valuer visiting the property but only inspecting the exterior. They assess condition and location from outside. These are used by some lenders for lower LVR applications where the lender's risk exposure is limited.

When the Valuation Comes In Below Purchase Price

This is the scenario that creates the most anxiety in home buying: you have agreed to pay $850,000 for a property, the lender's valuation comes in at $810,000 and suddenly the numbers do not add up.

The lender bases your LVR on the valuation figure, not the purchase price. So if you were planning to borrow 80 per cent of $850,000 ($680,000) with a $170,000 deposit, a valuation of $810,000 means the lender will only lend 80 per cent of $810,000 ($648,000). You now need to bridge a $32,000 gap from your own funds, accept a higher LVR with LMI consequences, or renegotiate the purchase price.

Reasons for a Low Valuation

A valuation can come in below purchase price for several reasons:

Overpayment at auction, where competitive bidding pushed the price above fair market value.

Insufficient recent comparable sales in the area.

The property has features the valuer assesses as reducing standard market appeal.

Broader market conditions have shifted between when you agreed to the price and when the valuation was conducted.

Options if You Get a Short Valuation

You can challenge the valuation. Provide the lender with comparable sales data that supports the higher price. If the valuer has missed relevant recent sales, this can sometimes lead to a revised figure.

You can order a second valuation with a different lender. Valuation figures are not uniform across all firms. A different valuer or different lender may assess the property differently.

You can increase your deposit to cover the shortfall, accepting the higher out-of-pocket cost.

You can renegotiate with the vendor. A documented short valuation from a lender is sometimes leverage to renegotiate the purchase price, particularly if the vendor wants an unconditional exchange.

You can proceed with the higher LVR and accept the LMI consequences, if the property is still worth buying.

Properties That Attract Conservative Valuations

Certain property types and locations regularly attract conservative valuations or low maximum LVRs from lenders.

Inner-city apartments in high-density buildings, particularly in postcodes where significant oversupply has occurred.

Studio apartments and very small units under 40 to 50 square metres.

Serviced apartments and hotel-branded residences.

Properties in very remote or rural locations.

Properties with unusual features such as no car parking, commercial components or unusual construction materials.

Holiday areas with thin year-round sales volumes.

If you are buying a property in any of these categories, it is worth discussing the likely valuation outcome and lender restrictions with your broker before you exchange contracts.

Valuation vs Market Appraisal

The valuation ordered by your lender is not the same as a market appraisal from a real estate agent. An agent's appraisal is an estimate of what the property might sell for in the current market, typically optimistic since agents win listings with higher estimates. A lender's valuation is a formal assessment by a licensed valuer of the property's market value, conducted on a conservative basis to protect the lender.

Use the Borrowing Capacity and Purchasing Power calculators at HomeLoanTools.com.au to model scenarios including what happens if a valuation comes in short and whether your deposit can absorb a gap.