How do banks value properties?

When it comes to buying, selling or re-mortgaging property, it’s important to know how much the property is actually worth. With that said, it can often be tricky to estimate the property value yourself. And while you might be able to get a vague idea of the property value using an online calculator, banks and lenders often have their own way of valuing a property. It’s not uncommon for the value the bank provides to be worlds apart from the figure you find online.

Take a look at our property value guide to get a better understanding of how banks and lenders determine the value of a property.

What is a property valuation?

Before we get into how banks calculate property valuations, it can help to have an understanding of what a property valuation actually is. As the name suggests, a property valuation provides a set value for a home. Unlike a home appraisal, a property valuation is completed by a Certified Practicing Valuer (CPV) who is qualified to conduct a valuation. As part of the valuation process, the CPV completes a detailed valuation of the property and provides a legally binding report that details the precise value of the property.

Keen to learn more about the difference between property valuations and home appraisals? Check out our blog here.

How banks calculate property value

Completing a property valuation report is an important part of the home buying and refinancing process. Determining the value of the property provides banks with important information on how much they can comfortably lend you.

Banks will often engage an independent CPV to complete a property valuation on their behalf. During this process, the CPV will consider a number of different factors to determine the value of the property, including

• Property and block size
• The number of bedrooms and bathrooms
• Fixtures and fittings
• Property age and condition
• Location and vehicle accessibility
• Access to local facilities and amenities (for eg: schools, public transport and shopping centres)
• Council zoning, planning and restrictions
• Recent sales data
• Market conditions
• Economic environment

Types of property valuations

Thanks to technology and a plethora of data, many banks now have access to different types of property valuations, often making the process faster and more affordable. When it comes to the different types of property valuations, the general rule is the riskier the loan, the more detailed valuation will be. This risk of your loan is usually down to the strength of your application and the availability of data for the property and the surrounding area.  

Here are the four main types of property valuations.

Automated valuation model

An automated valuation uses computer software to carry out statistical modelling techniques based on the property attributes and comparable sales data to determine the value of a property.  

Desktop valuation

These days, CPVs can conduct desktop valuations for properties without having to physically view the home. This type of valuation uses various data about the property and the local area to calculate the value of the property.

Kerbside valuation

During a kerbside valuation, the CPV will visit the property and inspect it from the outside only. The information they gather from their inspection is then combined with online information and comparable sales data to determine the property's value.

Full valuation

A full valuation is the most comprehensive type of valuation. During a full valuation, the CPV will physically inspect the property, inside and out. They’ll assess the condition of the property from room to room, taking photos to support their assessment.

Why do banks value properties?

One of the main reasons banks complete a property valuation is to determine your loan-to-value ratio (LVR). The LVR provides a percentage figure that represents the total value of the property compared to the value of the loan. Banks use this figure to assess the risk of the loan. Ultimately, the lower the LVR, the lower the risk.

As a potential borrower, it also pays to stay across the LVR of a property. If your LVR is over 80%, meaning your deposit is less than 20% of the property value, you could be up for lender’s mortgage insurance. Plus, a good LVR could also open the door to better interest rates and more favourable home loan terms.                                                                                                   

Benefits of obtaining a property valuation

While it might seem like completing a property valuation benefits only the bank, valuations can also provide useful information for both sellers and buyers.

For sellers

If you’re in the process of selling your home, completing a property valuation can help you to work out a fair asking price. Overpricing the property can result in less interest from the market, whereas underpricing could lead to a financial loss. Plus, based on the results of the valuation, homeowners can make more informed decisions. They can decide whether it's the right time to sell, if any improvements or repairs are needed to increase the property's value or if it makes more financial sense to hold onto the property for a while longer. You can also obtain a home appraisal from a real estate agent, but these types of valuations are often based on the real estate agent's personal judgement which often doesn’t match up with how a bank would value a property.

For buyers

From the buyer's side, obtaining a property valuation prior to a sale can provide a solid basis for negotiations. If the valuation indicates that the property is overpriced, buyers can use this information to negotiate a lower purchase price with the seller and avoid overpaying. As a buyer, completing a valuation can also give you a better idea of how much a bank will be willing to lend you.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍