How do banks value property?

A property valuation is an important part of any mortgage application. This is so the bank or mortgage lender can be confident that the value of the property is enough to secure the loan, in case the borrower defaults on their mortgage repayments in the future. If a valuation finds that the Loan to Value Ratio (LVR) is too high, the borrower may need Lenders Mortgage Insurance (LMI) or a larger deposit to have their application approved. 

Different banks use different methods to calculate the value of a property. Also known as a “bank property valuation”, the method your mortgage lender chooses may depend on their own internal policies, as well as your financial position, the loan you’re applying for, and the status of the property itself. 

How does a bank appraise a house?

There are three main methods for a bank to value your property: 

A Desktop Valuation uses available data about the property (e.g. age, size, location, number of bedrooms, bathrooms and car spaces) and its local area (e.g. recent sales of similar properties, rising or falling price trends, zoning) to calculate the value of a property without the valuer having to leave their desk. 

A Kerbside Valuation involves a valuer visiting the property, but only assessing its appearance from the street, possibly without getting out of their car.  

A Full Valuation is where a valuer physically visits the site and gives the property a full inspection, going from room to room and taking internal and external photos to assess its condition.

Generally, the riskier the loan, the more comprehensive a valuation the lender may require. 

For example, if you’re applying for a home loan with a major bank, you have a strong application (e.g. you’re paying a high deposit and have a reliable income), and you’re buying an established property in a well-known area, the lender may simply use a Desktop Valuation to check the property value. 

But if there’s less information available about a property, or if your mortgage application isn’t the strongest, the lender may be more likely to conduct a Kerbside or Full Valuation. While this may slow down the process of applying for a home loan, it helps to ensure a more accurate assessment of the property’s value. 

A lender may choose to conduct a more comprehensive valuation if you’re:

• Applying for a low deposit home loan (especially if you’re paying LMI)
• Applying for a low-doc home loan
• Making an interstate or international property purchase
• Buying an off-the-plan apartment or home in a new housing estate, where the final value may not be known until construction is complete
• Purchasing property in a postcode where property values have been swiftly rising or falling, indicating a market that may not be sustainable

Ordering a free property report before you start the buying process and/or applying for mortgage may help you get a better idea of what to expect when a lender conducts a valuation. While the lender’s valuation may not match your property report exactly, the report can help you make more informed decisions around your property purchase and mortgage application.  

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