What does the bank think my house is worth?
Before I begin let me just give a quick master class on different types of Valuations:
- RATEFUL VALUE
( also known as Government Value, GV, CV, RV, sometimes QV)
This is the Valuation that Local Councils use to assess rates bills with. Because they are calculated every 3 years and based on Council Recordsthey can relatively be inaccurate. Despite this, lots of people use them as their basis for deciding on how much to spend on a property.
One can spend $50 and get an E-Valuation which isa Computer-generated Figure, based on publicly available records and comparable sales within the area. As part of this report, there is a margin for error type percentage which indicates how confident the program isthat the figure is correct.
- DESK TOP VALUATION
A report prepared by a Registered Valuer, however they don’t go physically to the property but base their figure on comparable sales and their knowledge of the property in the current market. This is arguably more accurate than an E-Valuation or Government Valuation.
- REGISTERED VALUATION (RVR)
A professional visits the property and compares that property with the local comparable sales and puts what they consider a current- fair market value of the property. This will cost in the vicinity of $600-700.
So given these, what does the bank think my house is worth?
If you are buying a new house, the bank will think your house is worth as per the negotiated sale and purchase agreement. In other words, it is worth what you paid for it.
In some situations, the bank will require you to geta Full Registered Valuation on the Property. This is particularly true if you have a low deposit. The bank will then believe the property is worth the lower of the Sale & Purchase Agreement or the Registered Valuation.
Sometimes people believe that if the property has a high Government Valuation and the Sale & Purchase is lower, they’ve got a bargain and the bank should lend based on the Government Valuation . Even in this case as bank will lend based on the lower figure.
Some banks have a policy that if the purchase price is significantly higher than the Government Valuation then the system will ask them to provide a Registered Valuation. This is potentially-particularly relevant currently in the Wellington Housing Market as there are very significantly price increases occurring at the moment.
I have recently had avaluer I know estimate that the Wellington House Market is going up by 1.5% per month. IF this is correct itmeans that the Rateable Value will quickly become outdated.
With house prices increasingly significantly, the challenge, can be, also that a Registered Valuation can become quickly outdated. A Valuer is tasked with a job of coming up with what they believe is a fair market value based on comparable sales. However, if those comparable sales are 1,2 or 3 months old, what somebody would need to do is to pay to secure a property in a rapidly rising market can be higher than their Registered Valuation. This can actually make things really difficult particularly for First Home Buyers who because they generaly have a small deposit are required to get a Registered Valuation.
If you currently have a property ( and Home Loan) at a bank and you want to purchase again or you want some extra money, the question again is “How much does the bank think my house is worth?” Assuming that the bank has had this property for years, they will begin by believing that the house is worth the Rateful Value, the Government Valuation, and they will base their calculation on these figure.
If your request means that there is not enough equity in the property based on this Government Valuation, the bank will generally then just complete an E-Valuation to see if this is higher. If this is higher and the application can be approved at the 80% level of the E-Valuation then this is the figure the bank will use.
If again, this figure isn’t sufficient, the bank would then request either a Desk Top but generally a full Registered Valuation if required to keep the loan to value ratio at an acceptable figure.
So in short, the bank will start with what is the potentially the lowest value of your property and if further funds are required they will step up through those different ways to value your property to try to get a deal to be approved.
It’s our job at Velocity to assist our client to help them achieve their financial goals and so we will use all of those different Valuation Method to assist our clients in various situations.
Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.