What is a bank valuation?

A bank valuation is an equation that’s used to determine the price of a property when a home loan is sought. A lender will use the bank valuation figure to calculate a loan to value ratio (LVR), and this figure will likely affect how much the bank will lend.

By this definition, it may seem that a bank valuation is simply the value of the house, but this isn’t necessarily the case. Instead, the bank valuation is an assessment of the value of the property, that’s completed specifically for the bank, rather than the market value.

Once the bank valuation is completed, the lender can use it to work out the loan to value ratio. This figure shows the percentage of your loan amount divided by the bank’s valuation of the property. For example, if the loan amount was $400,000 and the bank’s valuation was $500,000, then the LVR would be 80%. This is a good figure for the bank, as it means there will be a 20% down payment on the house, and the bank loan will cover the remaining 80%.

Many financial institutions will only lend home loans if 20% or more of the down payment is paid by the borrower. Sometimes, lenders will lend home loans with a smaller downpayment (for example 15%), however, this is usually reflected in things like higher fees and higher interest rates.

The difference between market estimate and bank valuation

Bank valuations and market estimations both determine the worth of a house, so what’s the difference? As mentioned above, a bank valuation is completed specifically for the house, so it’s determined in a different way from a market estimation.

A market estimate, on the other hand, determines properties worth based on the current market. So, a market estimate will take into account how much buyers are willing to pay in the current market. For example, Australia has seen a recent surge in house prices due to high demand. So, in the current market, a market estimate would come in much higher than a bank valuation, because demand is high.

Generally, bank valuations tend to be lower than market estimates. This is because the bank will be conservative in order to determine the risk when lending. 

A common case is where bank valuations are generally much lower than market estimates such as, when unregistered land is bought. This often happens when a developer sells newly acquired land as part of a development. Sometimes, it takes a developer a few years to build the infrastructures that are required in order to register the land.

How is the valuation calculated

When a bank valuation is undertaken, there are a number of factors that are taken into account. Some of these include:

• Location
• Number of bedrooms
• Building structure and condition
• Property and land size
• Council zoning, planning and restrictions
• Fixtures and fittings
• Vehicle access to the property and/or garage
• Recent sales and similar properties in the area
• Areas for improvement

Different types of valuations

Full valuation

A full valuation is the most in-depth type of valuation that’s conducted, and requires a valuer to inspect the property inside and out. An in-depth analysis will be done, and the bank will be supplied with information like the house’s condition, it’s age and zoning restrictions, as well as photos. A full valuation is usually conducted when there’s a high perceived risk to the bank.

Kerbside valuation

A kerbside valuation is a step down from a full valuation, in terms of complexity. It’s paired with an external inspection with sales data, to produce an evaluation of the property. A kerbside valuation is usually conducted when there’s a moderate perceived risk to the bank.

Desktop valuation

A desktop valuation works solely by utilising sales data to produce a valuation. It also uses the sale price of neighbouring properties to determine the final figure. A desktop valuation is usually conducted when the value of the house is low, or when there’s minimal perceived risk to the bank.

The process of getting a bank valuation

Usually, a bank valuation is done during the process of applying for, and receiving, a home loan. A bank will hire a licensed appraiser to determine the value of the property. The bank will decide whether a full valuation, kerbside valuation or desktop valuation is required.

The borrower will normally be required to cover the costs of the valuation, which can be up to $500, and the total process takes about 8-12 days to complete.