How to find the value of your property

How to find the value of your property

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

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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.

Example:

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!

Example:

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

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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

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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

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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. 

Example:

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.

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Learn more about home loans

What is my property value?

Your property’s value is how much your property is worth to a bank or mortgage lender, when it comes to securing a mortgage over a property and calculating the loan to value ratio (LVR).

A professional valuer assesses a property’s value based on data about the property, its sale history, and other recent sales in the area. The valuer may also visit the property to assess its condition in person.

A property’s value may be different to a real estate agent’s appraisal, which indicates how much a property may sell for. It’s also often different to a property’s sale price at auction or private sale, which shows how much a buyer thinks it’s worth in the current market. 

What is a property report estimate?

A property report estimate is an approximate calculation of a property’s value, found in an online property report. These estimates are typically based on the property’s age, size, location, and number of bedrooms, bathrooms and car spaces. The property’s history of previous sales, plus recent sales of similar properties in the local area, may also help to calculate the property’s current value. 

What is a valuation?

A property valuation is a formal assessment of how much your home is worth, to determine the Loan to Value Ratio (LVR) when you’re applying for a mortgage.

A valuation is carried out by a certified practicing valuer on behalf of a bank or mortgage lender, and is often based on available data about the property and recent sales of other similar properties in the local area. The valuer may also visit the property to assess its condition in person.

A valuation is typically different to an appraisal from a real estate agent, which is an informal estimate of how much a property could sell for at auction or via private sale.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Is it free to get your house appraised?

A house appraisal, in which a qualified real estate agent assesses a property to make an estimate of its value, is a service that is generally offered to homeowners free of charge.

Local real estate agents tend to offer free property appraisals to homeowners as a way to build a relationship with them, and potentially secure the listing if the homeowner has plans to sell.

It can also be a good opportunity for the homeowner to gauge the agent’s level of expertise and determine whether or not they would be an ideal listing agent for the sale of their home.

You may also like to consider using an online service like RateCity to get a free property value report. Similar to an appraisal, the report is a computer generated valuation based on a significant amount of data and insights, and can provide details including the estimated property price and information about similar properties for sale or recently sold in the area.

What is an appraisal?

An appraisal is the process by which a qualified real estate agent conducts an inspection and assessment of a property in order to make an educated estimate of its value, typically in preparation of it being listed for sale. It is not to be confused with a valuation, which is conducted by a Certified Practising Valuer on behalf of a mortgage lender to determine the Loan to Value Ratio in relation to the borrow amount.

To begin the appraisal, the agent will start by visiting the property and assessing features such as the size, layout, number of bedrooms and bathrooms, quality of fixtures and fittings, and how well it has been maintained.

Next, the agent will use the findings to compare the property the with other similar properties in the area that have recently sold. In doing so, they are able to determine a more accurate appraisal that is representative of the current market demand.