Market Valuation or Bank/Forced Sale Valuation? (Mortgage in Possession) What is the difference ?
A bank valuation will nearly always be less than the market value. This is because they’re not the same thing.
When you take out a home loan, banks use the home as security. For you, the security means that the bank may lend you more at a lower interest rate than without security for the loan. The valuation may be because you are buying your first home, looking at starting a property portfolio or selling. So there are a number of scenarios for getting a valuation done. They are also used by the bank in the event you are having difficulties with the loan and you’re no longer able to make the repayments, the bank may have to sell the property to pay back the loan.
When a bank does a valuation they have two options. A market Valuation is the market value of the property which is generally used when you are either selling your property, buying an investment property or a new home and a bank/forced sale valuation (mortgagee in possession) is when the bank has to sell the property and is often 5-10% lower than market valuations.
The bank uses a bank valuation to work out how much it might get if it has to sell the property. Though they will only sell your home if you’re having serious trouble with the loan or you’re really behind with your mortgage repayments. This may sometimes be for a lower amount than you would ask for. This is because the bank wants to sell the house as quickly as possible to avoid further interest ect, they wont wait for the market to improve if it is in a lower cycle.
Also to make matters worse because the banks pay the valuers the lowest possible fees many of them value your property from the comfort of their desk!!! Some don’t even go out to the property – how can they see what is right or wrong with the property internally from their office – Insist that you are getting a market valuation done because a valuer sitting at his desk may not be giving you a correct valuation on what is possibly the biggest decision of your life and most banks policy is to only allow the same valuer to reassess a property so if he does a desk top valuation which is often what the bank requests they do and you then request a new valuation it will be done by the same assessor – chances are he wont be happy you are questioning him, so its not likely he will increase the valuation as that will show he was wrong in the first place.
Lenders rarely advise borrowers they are using forced sale values, but if you read the fine print on bank websites you may find wording such as:
“Sometimes, the figure we use will be less than the market value of your home and we don’t always tell you how much it is.”
“A bank valuation is not the same as the market value.”
If so, question what you are really getting.
Ok, so we have now been through some of the issues you might need to know about bank valuations and the next step you now need to know is how much equity you have in your home – so that you are able to start your investment portfolio!
What is home equity, and how can you use it to buy an investment property?
Equity, in plain terms, is the difference between what your home is worth and what you owe the bank. So lets say for example your home is worth $400000 and you owe the bank $220,000 then you have $180,000 equity in your home – the difference between what it is worth and what you owe.
So this equity is what you can use as security to purchase an investment property. You do need to be aware that most banks will only allow you to use around 80% of your equity – why not the full amount? because the bank will not allow you to use all the equity in your home in case the market drops and your house is now worth less than what is was, and you may end up owing the bank more than what the property is worth and the bank does not want to be holding security worth less that what you owe them.
So what is the value of an investment property you can buy with your equity?
So let’s say you can use $100,000 of your equity, then generally the rule is you should multiply this by four -eg: 4 x $100,000 = $400,000.00 so this is the maximum amount you may be able to borrow to purchase your investment property. The Bank will lend you 80% which is $320,000 you have $80,000 from your equity + $20,000 left for legal fees and stamp duty.
Be aware though when you are considering using your equity to purchase an investment property, the bank won’t automatically lend you the money, they will still look into your income and debts ect to ascertain that you are able to service the loan without getting into difficulties.