If You Are Considering Refinancing Your Existing Home Loan then You Need to Know how Valuations Work

One of the most contentious areas in the property industry at the moment is the issue of valuations and what a property is really worth. If you are looking to either refinance your loan, increase your existing loan to get cash out or consolidate some debts then the issue of how much your property is worth is of critical importance and it can be difference between getting your loan approved or not.

The reason that valuations are so controversial is due to two factors:

1.       How they are prepared. That is, what information is used by the valuer to work out how much a property is worth.

2.       What cycle your state property market is in. For example, the Perth market is in decline at present and therefore valuers will be undervaluing properties compared to what their owners think they are worth.

Remember, to get a loan approved you must not only show that you can service the loan but also your property must be in acceptable condition and is worth a certain value so as the bank can take security over the property.

If you are thinking about refinancing your loan and you are not sure of its value the best course is to get your broker to arrange a valuation with the proposed lender before lodging a loan application. This strategy works well in markets where prices are going down, such as the Perth market at the moment.

This ensures that a whole load of work is not done before a bad valuation is received. There is nothing worse than lodging a loan application, getting it conditionally approved and then receiving a valuation where the value of the property is too low for the loan to be approved.

The mechanics of a valuation works like this; your broker orders the valuation through the bank. The valuer then contacts you to make a time to come out and look at your property. Once he has seen your property he then prepares a report on it and gives your property a value and then submits the report to the bank. The bank then assesses the valuation and will either inform the broker of the property’s value or send a copy of the valuation report through to the broker.

It is important to know how a valuer works out the value of your property. The main indicator that they look at is the last three months sales in your suburb of houses that are comparable to your property. Your house is then compared to each sold property and is ranked either inferior or superior to that house. The ranking can be based on a large range of factors such as land size, number of rooms, the age of house and when it was built. Finally, the valuer gives your property a value based on this information. If the value is lower than the customer thinks there house is worth then this methodology can cause a lot of controversy.

If the valuation is low then the only way the valuation can be challenged is by obtaining information on the last three months sales in your area that shows that the valuer has made an error or has undervalued your property in some way. This is very hard to do and so usually the easiest course of action if this happens is to approach another lender and get a different company to do a valuation.

Given the current reality of the Perth property market and the fact that prices are falling it is important to be aware of how valuations work. If you are thinking about refinancing your home loan then the best thing to do is request your broker to obtain a valuation on your property prior to doing the new home loan application. By doing this you may save yourself a lot of angst as the whole process of refinancing a property can sometimes be quite stressful.

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