In the property market, a bank valuation is key to how much a bank will lend you. But what happens if the bank valuation is higher than the purchase price?
This is less common but can present opportunities and challenges. Let’s break it down what it means, why it happens and how you can use it to your advantage.
Understanding Bank Valuations
A bank valuation is an estimate provided by a professional valuer hired by the bank. This valuation is typically conservative because the bank aims to minimize its risk.
It involves an analysis of several factors, including comparable sales data, the property’s condition, and overall market conditions.
The bank uses this valuation to determine the maximum loan amount it is willing to offer, based on the loan-to-value ratio (LVR).
Bank valuations are generally lower than the market value or purchase price. However, in some cases, the bank’s valuation might come in higher than what you agreed to pay for the property.
Why Might a Bank Valuation Be Higher Than the Purchase Price?
Several factors could lead to a higher bank valuation:
- Rising Property Market: If the property market is experiencing growth, the bank valuation might reflect anticipated future property values. This is especially true in hot markets where demand exceeds supply, driving up prices.
- Well-Negotiated Deal: You might have secured the property at a purchase price lower than its market value. If the seller was motivated to close quickly, you might have gotten a better deal, leading to a higher bank valuation.
- Unique Property Features: Properties with unique features, such as a prime location, large land size, or recent renovations, can command a higher market value. These features might lead the bank’s valuation to exceed the agreed-upon purchase price.
Implications of a Higher Bank Valuation
When the bank valuation is higher than the purchase price, it can lead to several positive outcomes:
- Lower Loan-to-Value Ratio (LVR): A higher valuation reduces your LVR. A lower LVR can result in more favourable loan terms, such as lower interest rates. It also reduces the bank’s risk, making your loan more attractive to them.
- Increased Equity: A higher bank valuation means you instantly gain equity in the property. This can be beneficial for refinancing or taking out additional loans in the future.
- Avoiding Lenders Mortgage Insurance (LMI): If the higher valuation brings your LVR below 80%, you can avoid paying LMI. This insurance is usually required when the loan exceeds 80% of the property value. Avoiding LMI can save you a significant amount of money.
- Better Loan Terms: With a higher bank valuation, you may have the opportunity to negotiate better loan terms, such as a lower interest rate or more flexible repayment options.
Potential Risks of a Higher Bank Valuation
While a higher bank valuation has benefits, it also carries potential risks:
- Market Fluctuations: Property markets are volatile. A higher valuation now doesn’t guarantee that the property’s value will remain high. If the market declines, you could find yourself with less equity than expected, especially if you’ve borrowed more based on the higher valuation.
- Overconfidence: A higher valuation might give you a false sense of security about the property’s worth. It’s important to remain cautious and not overextend yourself financially, especially if market conditions change.
- Challenges in Future Sales: If you plan to sell the property in the near future, remember that the bank valuation is just an estimate. The actual sale price could be lower, depending on market conditions, buyer demand, and other factors.
How to Leverage a Higher Bank Valuation?
If your bank valuation is higher than the purchase price, here’s how you can make the most of it:
- Negotiate Better Loan Terms: Use the higher valuation to discuss better loan terms with your lender. A lower LVR can help you secure a better interest rate.
- Refinance with Confidence: With more equity in the property, you may explore refinancing options sooner. Refinancing could help you get a better deal on your mortgage.
- Plan for Future Investments: The increased equity can be used as leverage for future property investments or renovations, helping you grow your wealth over time.
- Avoid LMI: Check if the higher valuation allows you to avoid paying LMI, as this could save you a significant amount of money.
Consulting Real Estate Agents and Mortgage Brokers
When dealing with a higher bank valuation, it’s wise to find real estate agents and mortgage brokers. to seek professional advice.
A real estate agent can provide insights into the property’s market conditions and help you understand whether the bank valuation reflects the true market value.
Meanwhile, a mortgage broker can assist in negotiating the best loan terms based on the valuation.
Conclusion
A higher bank valuation than the purchase price can provide significant financial advantages, such as increased equity, better loan terms, and the potential to avoid LMI.
However, it’s crucial to approach this situation with caution, keeping in mind the risks associated with market fluctuations and over-leveraging.
By understanding the implications and seeking advice from professionals, you can make informed decisions that align with your financial goals.
For more insights on property valuation and bank processes, consider exploring resources on how to evaluate a house or consider getting a professional property valuation.
FAQs on ‘What Happens If Bank Valuation Is Higher Than Purchase Price?’
What happens if a bank valuation is higher than the purchase price?
If a bank valuation is higher than the purchase price, you’re in a favorable position. The transaction will proceed at the agreed sale price, potentially allowing you to gain instant equity in the property.
Can a bank valuation be higher than the purchase price?
Yes, a bank valuation can be higher than the purchase price. When this occurs, the buyer can choose to proceed with the purchase at the agreed sale price, benefiting from the higher market value of the property.
Can you dispute a bank valuation?
Yes, you can dispute a bank valuation. To do so, gather all relevant documents and present a comprehensive case to the bank or the valuer. A mortgage broker can assist you in challenging the valuation if it’s reasonable to do so.
What happens if a bank valuation is lower than the offer?
If the bank valuation is lower than the offer, it usually means you can’t borrow as much. The lender will base the Loan to Value Ratio (LVR) on the lower of the purchase price or the valuation. This might require you to contribute more cash to cover the difference.
