It’s romantic to measure what a home is worth in terms of love, memories, or similarly sentimental metrics. Unfortunately, banks and other mortgage lenders aren’t renowned for their sense of whimsy, and prefer to measure the worth of properties in dollar values.
Getting an accurate idea of a property’s value is obviously important when buying or selling, but it’s also essential when refinancing, as it plays a major role in determining your level of equity, which in turn helps to determine how much you can borrow when refinancing to a new mortgage.
Property value basics
Just like any other asset or personal possession, the “worth” of a piece of real estate starts with what someone is willing to pay for it. When someone buys or sells a property, the sale price they pay effectively indicates the property’s general value.
However, a property’s value doesn’t remain at its last sale price, but changes over time, based on a wide variety of factors. Even if a home isn’t currently on the market, it’s often important to get a clear idea of what it could theoretically be worth if it was to be put on the auction block tomorrow – its estimated market value.
Increases to a property’s value, known as capital gains, occur when improvements are made to the property itself, such as renovations or extensions, or if the property’s location becomes more desirable to tenants or occupiers, such as when a once-quiet area starts booming with improvements to infrastructure and lifestyle.
Decreases to a property’s value, known as capital losses, can also occur. If a property is unmaintained or damaged, or if its area becomes oversupplied or lacking in available infrastructure for occupants and tenants, it’s less likely to fetch a high price.
Popular wisdom says that on average, Australian properties double in value every 10 years. Take that wisdom with a generous helping of salt though, as it doesn’t always line up with historical data. According to a February 2016 CoreLogic report, capital city home values increased by 151% from 1996 to 2006, but only 72% from 2006 to 2016. It’s also important to remember that rates of increase for property values can vary wildly between different areas – growing suburbs can quickly shoot up in value, while unpopular areas may experience declines.
Years ago, Kimberly bought a unit for $370,000. Since her initial purchase, she has made internal renovations to the apartment, and improvements to the local public transport infrastructure has led to growth in the surrounding suburb. As a result, it is estimated that Kimberly’s unit has increased in value to approximately $700,000.
What is equity, and why is it important when refinancing?
Simply put, “equity” is the percentage of your property’s value that you can call your own, and isn’t being held by your mortgage provider. This includes the deposit on your mortgage and any repayments you’ve made to date, as well as any capital gains experienced by your property that have increased its estimated market value.
For a quick and simple way to determine your home’s equity, use the following formula:
Equity = property value – outstanding loan amount
Equity is important because you can make it work for you. By refinancing your home loan, you can unlock the potential of your equity, using it to secure a line of credit to enhance your day to day lifestyle, or to serve as a deposit on an investment property, or on a personal or car loan. The possibilities are (almost) endless!
When Kimberley first bought her unit, she paid a 20% deposit of $74,000, and borrowed the remaining $296,000. Over the years, she’s paid back another $100,000 of her loan’s principal.
To determine her equity, Kimberley subtracts the $196,000 she still owes on her home loan from her unit’s current value of $700,000. This means that Kimberley effectively has access to $504,000 of equity in her property.
Home loans for refinancing:
How to find your property’s value – the DIY way
Even if you’re not a real estate agent or a professional valuer, you can determine a property’s approximate market value by comparing the recent sale prices of similar properties. This approximate property value can be handy when making general financial estimates, such as when using RateCity’s mortgage calculators, however you’ll need a more accurate figure when applying to refinance.
To find your property’s estimated market value, you’ll need data on recent property sales in your area. There are businesses that offer access to real estate data on a subscription basis, though it may be simpler and cheaper to browse the archives of the real estate section of your local newspaper (online or in print) or attending a few local auctions (just don’t bid!).
It’s important to compare apples with apples, and properties with similar properties. Don’t look at recent apartment sales if you’re estimating the value of a house. Try to compare properties with similar numbers of bedrooms, bathrooms, car spaces, and so on.
As well as recent sales, the asking prices for local properties currently on the market can sometimes give you an approximate indication of property values in the area. However, because some vendors have overly optimistic expectations of what their property is worth, these asking prices tend to be less accurate indicators of property value than sales data.
As the old saying goes, the three most important aspects of a property are location, location, location. Prioritise available listings and sales in your local area – your own street if possible, otherwise the surrounding suburb.
Once you have a short list of recent sales of similar properties in your local area, arrange these in order of price. Look at a property in the middle of the list, and consider whether your property would realistically sell for more more or less, based on factors such as location, size, number of rooms, car spaces, recent renovations, wear and tear and so on. Based on your answer, move up or down the list and repeat the process.
Keep going until you find a sweet spot between two properties – your property’s approximate value will likely be somewhere between these two totals.
How to find your property’s value – Online valuations
As well as the above DIY method, there are faster and simpler ways to get an idea of your property’s estimated market value.
There are several online tools and apps that can estimate a property’s approximate value based on past sales data, recent sales in the area, and other general market trends. These tools can often prove useful, as they base their results on a greater amount of more precise historical data than you may be able to easily access.
These online calculators include, but aren’t limited to:
In many cases, you can access the basic details of your property’s value for free, but for a more detailed report on your property and the surrounding area, you’ll often need to subscribe to the service or purchase a premium package first.
Keep in mind that depending on your area, these calculators may not be able to provide a valuation estimate with a great deal of confidence, such as if there isn’t enough recent sales data on similar properties in your area to make an accurate comparison. Plus, because these calculators only use real estate data and market averages to reach their conclusions, they don’t always account for some of the fine details and “x-factors” that can affect the estimated market value of individual properties, such as its facing, internal renovations, or the quality of its garden.
In cases like this, you may need to turn to a professional.
How to find your property’s value – Professional property valuation
Finding the approximate value of your property yourself or using an online calculator is all well and good for estimating the potential affordability of refinancing your mortgage using RateCity’s Home Loan Calculator, but when it comes to making applications and signing on dotted lines with lenders, some professional help will be required.
As part of the mortgage approval process, whether you’re buying a new home or refinancing a property, a professional valuer will be required to assess your property. Valuers use detailed property data and professional training and experience to make accurate value assessments that are specific to your property, and they are legally responsible for the information they provide.
A professional valuation is different to an appraisal from a real estate agent, as a valuer’s report can make a serious impact on your home loan application, whether you’re buying or refinancing. Banks and other lenders use professional valuations to make sure they don’t accidentally lend you more money than your property is worth, which could risk leaving the lender out of pocket.
When buying property, more than one borrower has run into trouble where their bank’s valuation has come up short, forcing them to make up the shortfall between the mortgage and the valuation out of their own savings.
When refinancing, a low valuation can affect your total available equity, which can be the difference between having to pay Lender’s Mortgage Insurance (LMI) on your refinanced mortgage or not.
Patricia owes $300,000 onto the mortgage on her unit, and would like to refinance onto a better deal so she can start paying it off faster. She applies to refinance on the assumption that her property is worth $380,000, which would mean she has $80,000 in equity – enough to secure a 20% deposit ($76,000) on a new loan.
However, the bank’s valuer comes back stating that Patricia’s unit is worth only $370,000. This would mean that Patricia only has $70,000 in equity available, which is just short of the the 20% deposit ($74,000) required. If Patricia wants to go through with her refinance, she’ll have to pay LMI to the tune of around $2550.
Some banks and lenders employ their own professional valuers, to make sure that properties are valued according to their preferred standards. If you’re concerned about the potential risk of bias, or if you’d like a second opinion on your property’s value, it is possible to bring in a valuer from a third party, though not all lenders will accept third-party valuations. Plus, you’re more likely to have to pay for an independent valuation yourself, rather than having the lender cover the cost as part of the loan application process, as offered by some home loan providers.