People building a new home are often shocked when their bank valuation is less than the cost of the land plus the build cost.
Problems With Low Valuation
The two issue are
- Unless your deposit is larger than the difference between the Final Cost and the valuation you will be unable to finance the build.
- Even if your deposit is enough to pay the difference you may find you have to pay Lenders Mortgage Insurance which can add significantly to your payments.
Reasons For Low Valuation
The bank valuation is aimed at estimating how much the bank would be able to sell the house for if you default on your mortgage payments. . . . . . They are not really interested in how much its going to cost you.
What interests the bank is how much roughly comparable houses are selling in the same area.
Here are some reasons why the Bank Valuation may be low:
- Architect, or Custom Designed Homes – You may get the value for an individually designed home in an expensive suburb but in a typical subdivision, of mainly project homes, its less likely
- Over Development – Putting too much house on a block can have a detrimental effect on value if you don’t have enough outdoor areas.
- Bigger Than Other Houses – Valuers always have a difficulty in providing a valuation that is significantly higher than the median value of the suburb.
- Too Many Upgrades – Watch the Home Shows and you can spend many extra thousands on Kitchens and Bathrooms which may add little to the value.
- Overpriced Land – Watch out for Developers who offer cashbacks, pay your house deposit, or discounts for remaining blocks on the subdivision. What this generally means is that the original price was set above the true value.
- Swimming Pools – As many people hate swimming pools as love them so you rarely get any additional value even if you have spent tens of thousands.
- Market Downturn – Could be due to a local industry closing or a more general recession but its unrealistic to assume property prices will always rise.
- Location – Recent floods or bush fires will have a negative effect on value.
- Site Works – Sloping Blocks, Building on Fill, or Reactive Clay; all can add costs which you may not get back.
What You Can Do
Banks are really allergic to high levels of risk so though you can try Option 1 and Option 2 below but you may need to resign yourself to Option 3!
- Contact the valuers to get some background to the reasons for the valuation, or even look to get your own valuation.
- Try other lenders
- Revise your expectations by cutting down the house size, and or upgrades.