Do You Need A Valuation To Refinance?
Yes, you do. A valuation is required when you refinance your home loan to determine how much risk you pose. A valuation protects the lender by ensuring that you’re not borrowing more than your property is worth.
The lenders will rely on the valuation to confirm whether or not your application meets their lending criteria. The valuation will determine your current LVR and:
- Your interest rate (as rates are tiered to your LVR)
- If the security (home) is acceptable
- If you have enough equity available (if you’re refinancing to access equity, cash-out, debt consolidation, etc)
Between the time you bought the property and the time you decide to refinance, significant changes to the value of your home may occur. Since you are taking out a new home loan during a refinance, your lender will need updated information regarding your financial situation.
Why You Should Not Refinance If Valuation Is Low
The more equity you have in your home when you refinance the better, so you don’t want to miss out on any because of a low valuation.
In fact, if the valuation comes in too low, it might be better not to attempt to refinance, as your application will probably be rejected.
- If your valuation is low enough that the amount you want to borrow when refinancing is less than the stated value of the home, your application will be rejected.
- If you have not built up substantial equity, then a lower valuation could make you avoid refinancing when you shouldn’t.
- You might need to pay Lenders Mortgage Insurance (LMI) if the Loan-to-Value Ratio (LVR) is more than 80% of the property value. A low valuation makes this more likely.
What’s The Difference Between Valuation And Appraisal?
You might see the terms property appraisal and valuation used interchangeably, but there are differences between them. While both are used to determine the value of your home, lenders do not accept appraisals during refinancing.
| Details | Valuation | Appraisal |
|---|---|---|
| What is it? | It is a formal report done by a certified valuer to determine the value of your home | The value of your home is determined based on sales history and the knowledge of the local area |
| Who does it? | An accredited valuer will perform the property valuation | A real-estate professional will do the property appraisal |
| How is the value determined? | The valuer will look at the location, property size, and interior and exterior condition. | The appraiser will look at sales data and their own knowledge of the area |
| Do lenders accept it? | Yes, lenders accept property valuations during a refinance. | No, banks do not accept property appraisals during a refinance, as they are neither accurate nor reliable enough. |
| When to use it? | When you are getting a home loan or need to refinance | When you are selling your home and need to get a ballpark estimate of how much it would get. |
How Do Banks Determine The Property Value?
There are three ways a bank or lender determines the value of your property when you refinance:
- 1. Desktop valuation: A desktop valuation is an automated computer valuation using property data, recent comparable sales and property listings.
- 2. Kerbside valuation: This is mostly used for low-risk loans; a valuer inspects the property’s exterior from the street and does not enter the premises.
- 3. Full valuation: A certified valuer visits your property to carry out a full valuation.
Some lenders can do an automated online valuation if you meet the requirements. This is relatively fast and is often available if you borrow less than 80% of the property value. However, the requirements vary among lenders.
Our brokers can do a free upfront valuation with many of our lenders. A real-estate agent’s appraisal or one from a valuation company that you order yourself will not be accepted by lenders. They have their own requirements for valuations and a strict process to follow.
How To Ensure Your Property Is Valued Properly During Refinance
Variations for refinance can vary significantly among lenders. Each one has its own valuers and methods.
The secret, then, is to get valuations from more than one lender. A broker can do this and then lodge your loan with the most suitable one after considering their valuation and interest rates – along with your needs.
Do you need to ensure your property has the highest valuation for a refinance? Our mortgage brokers can help. Call us on 1300 889 743 or enquire online today.