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What to do if the house valuation is less than your offer

What to do if the house valuation is less than your offer

Getting a home loan preapproval doesn’t mean your mortgage is automatically guaranteed. Many lenders preapprove home loan applications on the condition that the value of the property being bought is enough to secure the loan. If the lender’s valuation comes back short of the price you’ve offered to pay, you could be left in a difficult financial position, though there are steps you can take to try and recover.

Why do home loans need valuations?

Home loans are typically secured by the value of the home being purchased. If you default on your repayments, your lender will be able to repossess and sell your property to help recover the money they lent you. 

When you make an offer to buy a property, the lender will conduct a valuation to confirm the property’s value. If there’s a big difference between your offer and the valuation, giving you a home loan may put your mortgage lender at more risk than they’re willing to accept. This could lead to your mortgage application being declined.

The level of financial risk a lender is willing to accept can be found in the maximum Loan to Value Ratio (LVR) for a home loan offer. For example, if a home loan is advertised with an LVR of 80 per cent, you’d be able to borrow up to a maximum of 80 per cent of the property’s value, and would have to pay the rest upfront as a deposit.  

Why do valuations come up short?

  • Prices in your area have fallen dramatically: In the past, major economic events such as the Global Financial Crisis have led property values in some areas to quickly fall in value. If something similar were to occur in between making an offer on a property and the valuation, your valuation could potentially fall short.
  • The property has big problems: If you missed a significant structural issue (e.g. foundation cracks, termite infestation, rising damp) when inspecting the property and/or ordering a building report, the property may hold less value than you expect.  
  • Not enough information: If there haven’t been any recent sales of comparable properties in your area, the valuer may not have enough data to accurately assess the property’s value. This may also be the case if you’re buying property off the plan or buying land to build on in the future, as the final value of the property may not yet be known.  
  • Your offer is too high: Maybe you got carried away at the auction. Maybe you wanted to make an offer high enough to scare off competing buyers. But if you offer too high a sale price for a property, you may go too far beyond what the house is worth according to the valuer.

What happens if a valuation is lower than your offer?

If the valuation comes back short, it may mean that your preapproved mortgage no longer fulfils your lender’s LVR requirement. This could lead to a few different outcomes, depending on your exact situation:

  • Higher rates/fees: To buy the property, you may need to switch to a different mortgage offer from your lender, one that allows a higher LVR. Generally, the higher your LVR, the higher the interest rates and/or fees a lender is likely to charge for a home loan, which could increase your monthly repayments.
  • Lender’s Mortgage Insurance (LMI): If, after the valuation comes back, you’d be borrowing more than 80 per cent of a property’s value, your lender may need to take out an LMI policy to cover the higher risk if you default on your repayments. LMI covers the lender, not you, and most lenders will pass the cost of LMI on to you – the higher your LVR, the more you may have to pay. This can potentially add thousands (or even tens of thousands) of dollars to the upfront cost of buying a property.
  • Missing out on your loan, and your property: If you aren’t able to work out a new arrangement with your mortgage lender, you may not be able to follow through with your offer to buy the property. Breaking settlement like this could mean forfeiting your deposit on the property, leaving you out of pocket.

What can you do if the house valuation is less than your offer?

  • Pay a higher deposit: If you have the savings available, or can otherwise get more money together in a timely fashion, you may be able to make up the LVR shortfall by increasing your home loan deposit.
  • Get a guarantor: Arranging for a parent or similarly close family member to guarantee your loan with the equity in their own property may be able to help make up for a valuation shortfall. Going guarantor comes with its own share of risks to consider, and it may be challenging to organise on short notice.
  • Find another lender: If your preapproved home loan is no longer appropriate for this property purchase, you may be able to find another lender who can provide a mortgage. Keep in mind that you’ll likely have a limited amount of time to compare home loans and negotiate a new deal.
  • Get a second valuation: Valuers sometimes err on the side of caution when calculating the value of the property. They also sometimes make mistakes, or rely on outdated or inaccurate data  (e.g. not taking into account internal renovations to a property that changed the number of bedrooms, bathrooms etc.) If you can provide the valuer with new and accurate information to correct any errors found in the valuation, you may be able to get another shot.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

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. 

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

What is the ANZ home loan settlement process?

Settlement is the procedure for the official transfer of ownership between the seller and buyer. It’s often done without the seller or buyers input but between both parties’ the financial and legal representatives.

Here is how the ANZ home loan settlement process works:

  1. The solicitor or conveyancer prepares the Transfer of Land document at least two weeks before the settlement date.
  2. The signed document is registered at the state or territory land registry office.
  3. Your solicitor or conveyancer will connect with the ANZ home loan settlement contact and the seller’s solicitor or conveyancer to finalise the date, time, and place of settlement.
  4. You must deposit any applicable amount into your ANZ account three days before the settlement date.
  5. After the settlement is completed, your solicitor or conveyancer will send you a Statement of Adjustment confirming the disbursal of funds from your home loan amongst the involved parties.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

What are the benefits of a reverse mortgage from P&B Bank?

A reverse mortgage allows senior homeowners to unlock the equity in their homes. There is no repayment schedule, and the loan is repaid at the time of selling, if you move out or when the homeowner passes away. The interest accumulates on the outstanding amount and is added to what was initially borrowed.

Here are some benefits of applying for a P&B Bank reverse mortgage:

  • Flexibility to use the funds as desired; you can travel, pay for medical bills or undertake home improvements or use it for your regular living costs
  • A negative equity guarantee ensures the amount you have to repay never exceeds the value of your home
  • A reverse mortgage does not have a regular monthly instalment, and you can repay any amount you wish at any point during the loan tenure
  • You can choose to withdraw the loan amount as per your requirements

The P&B Bank reverse mortgage amount is based on factors like your age, location of the property, and the loan-to-value ratio (LVR).

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.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

What is the ME bank home loan approval time?

To start the process of getting a loan with ME bank, you can fill out the online application form. You’ll have to provide information about your income details, assets and liabilities, and the property you want to buy.

Generally, the pre-approval of your loan application can happen within four hours, and in some instances, it may take up to two weeks. It’s important to remember this is only conditional approval.

If you make an offer and the seller accepts it, you’ll need to wait for the cooling-off period, which varies from two to five days depending on where you live. After that, it can take between six and eight weeks after contracts have been exchanged for your application for unconditional approval to be processed.

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 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 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.

How fast can you get a home equity loan?

Completing an application for a home equity loan may only take 20 to 30 minutes. It may take a lender anywhere from a day to a few weeks to process and approve your application. This may be affected by your financial situation, your level of equity, and whether or not your lender needs to organise an in-persona valuation of the property.

 Before you can apply for a home equity loan, you’ll need to build up some equity in your property. The more money you can put towards extra repayments to reduce your home loan principal, the faster you can increase your equity. Also, if property values in your area increase, this may help deliver an instant equity increase once your property has been valued.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.