Low bank valuations are a real risk, particularly for buyers with smaller deposits, and especially in a booming market. Consider the following scenario.
Hollie and Sam are preparing to buy a new home in their popular suburb. The house they want is for auction, and they expect it will sell for around $1.8 million. They’ve saved enough for a 20% deposit plus stamp duty and fees, and they have conditional approval from their bank to borrow the remaining $1.44 million.
Come auction day they are the successful bidders at a sale price of $1.805 million. Following the auction, the bank proceeds to have the home valued. The bank valuation comes in at $1.6 million. The bank may not loan more than 80% of the value of the home – a maximum of $1.28 million. They now have a shortfall, and if they cannot find the extra money required to purchase the home, the ramifications can be far worse than simply missing out on the home; they’ll lose the deposit that they paid on auction day, and open themselves up to a potential law suit from the vendors for the loss of the sale.
Low Bank Valuation – What You Can Do
If your property valuation comes back lower than expected, consider these options to avoid being left without a loan:
• Show your lender that you can cover the shortfall with a higher deposit.
• Consider borrowing more than 80% of the home value; this would require taking out lenders mortgage insurance.
Avoid the Trouble
However, it is best to avoid this situation in the first instance. We offer this advice for clients:
• Room to Move: If possible save more than 20% deposit for a property to allow for some upward movement in purchase price or downward movement in the bank valuation.
• Know Your Market: Don’t get caught up in the hype of how desirable a suburb is. Do your research on previous sales in the area to ensure you are not bidding over market value.
For more advice or assistance securing a loan, please contact me on (02) 9908 9888.
Patricia Williams is a credited representative (CRN 400458) of BLSSA Pty Ltd (Australian Credit License No. 391237).