What is a mortgage valuation?

A valuation for a mortgage is a formal report, completed by an accredited valuer to give a lender an idea of what a certain property’s value might be.

A valuation is a critical part of the home buying process, so it’s vital that borrowers understand how it all fits in.

A formal valuation differs from an appraisal, which is just an indication of what a property is worth based on the opinion of someone such as a real estate agent. When a lender offers a home loan, it is normally conditional on an adequate valuation.

A lender firstly wants to make sure that a purchaser is being given fair market value for a home. They also want to know how much the home buyer is going to need to borrow so they can establish a loan-to-value ratio for the borrower and the property.

From the perspective of a lender, the more a home buyer is required to borrow, the more risk they are taking on. When a borrower falls below the 20% deposit threshold, a lender will typically require borrowers to pay Lenders Mortgage Insurance (LMI), which is a one-off upfront premium taken out to protect the lender in the event the borrower is unable to manage their repayments.

For that reason, valuations are detailed assessments of a property’s value that takes into account the location of the property, as well as the property’s type, size and condition, any structural faults, any caveats or encumbrances on the property, and even local council zoning.

A valuation is also required should you look to refinance your current property and move to a new lender.

In most instances, the valuation will likely be organised by your lender, however, there will be a fee which needs to be paid upfront.

Valuations can work through an automated valuation model (AVM) or a full valuation. An AVM will likely use an algorithm to determine the value of the property based on property market data and the specific information relating to the features of your home.

A full valuation involves a valuer physically attending your property to do an in-house inspection. They will then combine their analysis from the inspection with comparable sales and market data to determine their decision. Sometimes a valuer will do a kerbside inspection, where they don’t actually enter the property and only view it from the exterior.

In some situations, if a valuation comes back lower than what you paid for a property, then you may be required to come up with a larger deposit or pay Lenders Mortgage Insurance (LMI).