Getting a home valuation for home equity loan: what you need to know

To access the equity in your home you’ll need to know your property’s current value. To get an accurate figure a property valuation may be required, though the type of valuation may depend upon your property and financial situation.

What is equity and what is a home equity loan? 

Your equity in a property is how much of it you own outright. You can find your equity by taking the current value of your property and subtracting the remaining mortgage principal.

You may be able to use the value of your home equity to secure a loan, similarly to how you can use the value of a vehicle to access a secured car loan. These home equity loans could be used to help pay for renovations to your property, to buy a car, or go on a holiday. You may even be able to access your equity to take out a second mortgage on an investment property.

You may be able to access your home equity by refinancing and “topping up” your home loan by borrowing more. Alternatively, you could apply for a home equity loan that’s managed separately from your mortgage, or a line of credit that works in a similar manner to a credit card. Retired Australians who own their homes outright may also be able to apply for a reverse mortgage.

Why is a valuation required for a home equity loan? 

To work out how much money you can borrow with a home equity loan, you’ll first need to know the current value of your property. This will likely have changed since you first purchased the property, and may have been affected by its location, age, condition, and other factors.

You’ll then need to find out how much is left on your mortgage principal. This figure will reduce over time as you make principal and interest mortgage repayments, and when you make extra repayments that you don’t redraw.

Your lender will likely want you to retain at least 20 per cent equity in your property to keep your mortgage loan to value ratio (LVR) under 80 per cent and avoid requiring Lender’s Mortgage Insurance (LMI). Thus, your usable equity for a home equity loan will typically be 80 per cent of your current property value minus your outstanding mortgage principal.

While you may be able to get an estimate of your property’s value from a free property report, or from a real estate agent’s appraisal, this may not be accurate enough for a bank or similar financial institution to calculate a home equity loan. The bank or mortgage lender will likely require a valuation from professional valuer, whose training and qualifications allows them to be legally responsible for their findings. Because a valuer is looking at the property as an asset to be used to secure a loan, and not as a home or an investment property, the valuer’s findings may be different than an appraisal from a real estate agent.

How does a valuation work? 

There are several methods a valuer may use to calculate the value of a property:

• Desktop Valuation: Sometimes a valuer can accurately find the value of your property without ever leaving the office. If your property has a well-established sales history and is located in an area with plenty of recent sales of similar properties to compare to, the valuer may be able to use this data to calculate your property’s value quickly and accurately.
• Kerbside Valuation: If there is some information available about the properties in your area, but the valuer still needs to confirm the general condition of your property, they may be able to conduct their valuation from the footpath outside your house. This can help the valuer to confirm the status and condition of the property, it’s location and the neighbourhood.
• Full Valuation: If there’s not a lot of reliable information available regarding your property and/or recent sales of comparable properties in the area, then the valuer may instead conduct a full valuation by inspecting your property in person. This can also help a valuer account for any changes you’ve made to the property since it was last sold, such as extensions or major renovations.

The type of valuation that’s required may also be affected by how much home equity you would like to access. For example, if you’re applying for a relatively small home equity loan, perhaps a desktop valuation will be all that’s required, as the lender may consider their financial risk to be relatively low. But if you apply to borrow a large sum, the lender may want a full valuation conducted so they can calculate exactly how much they’ll be willing to lend you.

Keep in mind that you may need to pay a valuation fee when you apply for a home equity loan, as well as any other fees and upfront costs.

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