How to get the best result from your valuation when refinancing, even if the property market is falling

Falling property prices across the nation would understandably give vendors the jitters, but a market downturn could also be putting some home owners in a tricky position, even if they aren’t planning to sell any time soon.

Home owners and investors looking to refinance home loans – especially those who bought at the peak of the boom – could face an uphill battle if valuations of their properties come back lower than expected, or worse still, below purchase price.

A recent survey by online lender State Custodians revealed one in seven home owners were unsuccessful in refinancing their mortgage in the past because the value of their property had fallen.

The situation was worse for young home owners, with a third of 18 to 34-year-olds having trouble refinancing due to falling values.

State Custodians general manager Joanna Pretty said these figures weren’t surprising.

“Property prices have been stagnating and falling across much of Australia for some time now, especially in the major capital markets of Sydney and Melbourne, which has made refinancing a bit tougher for some,” she said.

“Anyone who has not yet built up a substantial amount of equity in property or whose property has fallen in value is more likely to be unsuccessful in seeking refinancing.”

Why an accurate valuation matters

When home owners try to get a better deal on their home loan or utilise equity in their property, lenders arrange a valuation to estimate what the property is worth.

An accurate valuation is critical, as properties with a high loan-to-value ratio (LVR) are deemed riskier than properties with a lower LVR.

Lower than expected valuations create problems for home owners, and can affect the interest rate lenders offer, as well as the amount of equity a home owner is able to withdraw to use as deposit for another property or put towards renovations.

• Related: Why your first property is the most important
• Related: How to avoid stretching your budget too far
• Related: Why homes are taking longer to sell

Valuations are also critical for buyers of off-the-plan apartments. If an apartment is valued lower than the purchase price, buyers may have to accept a higher interest rate or pay lender’s mortgage insurance, as their pre-approval assumed a lower LVR.

In some cases, if the lender won’t provide the level of funding previously indicated, buyers will be forced to stump up the extra cash themselves.

“Any home owner of a property located in an area or market that is currently experiencing declines in property values will be more likely to receive bad news when a valuation is done,” Ms Pretty said.

“Some of us find it difficult to accept that our property might be worth less than we paid for it, or that it hasn’t appreciated in value as much as we thought it would,” Ms Pretty said.

Valuers, not values may be the problem

But the situation might not be as dire as it sounds, as declines in values could be exaggerated by the valuers themselves, according to Anna Porter, founder of property advisers Suburbanite.

“When the market moves, the valuers might get nervous and overstate the facts,” she said, adding the high volume of work could cause valuers to rush the job. “Valuers are getting overworked by the banks. There’s more room for error.”

Ms Porter highlighted an “experience gap” in the valuation industry, pointing to the fact that many valuers hadn’t experienced a downturn first-hand, and were prone to exaggerating the effects a slowdown in the broader market could have on property prices.

She expected valuations would normalise once the market stabilises and prices stagnate or rise again.

What to do if your valuation comes back low

A lower than expected valuation might stop some home owners in their tracks, but according to Ms Porter, one low valuation shouldn’t be the end of the line and home owners should seek a second opinion.

“We work with brokers to review valuations because there’s a need for it,” Ms Porter said.

Making simple and cost-effective home improvements such as tidying up yards and painting walls or installing built-in wardrobes before valuation can improve the result, according to Ms Pretty.

“It may also be helpful to be present when a valuer visits in order to point out the improvements that may not be immediately apparent such as solar panels on the roof which may be obscured by trees.”

Despite a downturn in prices, Ms Pretty said it’s still a good time to refinance. “Interest rates are currently at near record lows and although increases are likely in the not-too-distant future, rates are still likely to be low relative to historical levels.”