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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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 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.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

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 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 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 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.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

How do I determine the value of my property?

Here we are asking you to estimate only. It’s often hard to get an accurate estimate of your property value.

Some real estate websites such as Domain, Realestate.com.au and Onthehouse will give you an estimate. However, be aware that a bank valuer might assume a lower estimate, so it can be a good idea to make your estimate slightly lower.

If you do apply to refinance, the lender might send a valuer out to your home, so it is worth being prudent.

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan.