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Property valuation is one of the most critical steps in the refinancing process, yet many homeowners underestimate its importance until a low valuation threatens to derail their plans. Your property's assessed value directly determines how much you can borrow, what interest rate you'll pay, and whether your refinancing application will be approved at all.
This comprehensive guide explains why valuations matter so much in refinancing, explores the different valuation methods lenders use, reveals what valuers look for when assessing your property, provides strategies for ensuring your property values favorably, and guides you through what to do if your valuation comes in below expectations.
Why Property Valuations Are Critical for Refinancing
Property valuations serve as the foundation for every lending decision your lender makes about your refinancing application.
Determining Your Loan-to-Value Ratio
Your loan-to-value ratio is the percentage of your property's value that you're borrowing. If your property values at eight hundred thousand dollars and you want to borrow six hundred thousand dollars, your LVR is seventy-five percent. This ratio is the single most important factor in your refinancing application.
Lower LVRs represent lower risk for lenders because you have more equity protecting them against potential losses if you default. Higher LVRs represent higher risk because there's less equity cushion. Most New Zealand lenders offer their best interest rates to borrowers with LVRs of eighty percent or below, with rates increasing as LVR rises.
An unexpected low valuation directly increases your LVR. If you expected your property to value at eight hundred thousand dollars but it comes in at seven hundred and fifty thousand dollars, your six hundred thousand dollar borrowing request suddenly represents an eighty percent LVR instead of seventy-five percent. This might push you into a higher interest rate tier or even require lenders mortgage insurance.
Establishing Available Equity
If you're refinancing to access equity for renovations, investments, or debt consolidation, the property valuation determines exactly how much equity is available. Lenders calculate available equity based on the valuation, not your opinion of what your property is worth.
A lower-than-expected valuation directly reduces how much equity you can access. If you planned to access seventy thousand dollars in equity but your property values fifty thousand dollars less than anticipated, you might only be able to access twenty thousand dollars, fundamentally changing your refinancing plans.
Confirming Adequate Security
Lenders need assurance that the property securing your loan provides sufficient protection for the amount they're lending. The valuation confirms that if you default and they must sell the property to recover their money, the property is worth enough to cover the debt plus selling costs.
If a valuation suggests the property provides inadequate security, lenders may decline the application entirely, require you to reduce the borrowing amount, or charge significantly higher interest rates to compensate for the increased risk.
Influencing Interest Rates and Terms
Beyond simply approving or declining applications, valuations influence the interest rate and terms you're offered. Properties that value strongly with clear comparable sales evidence give lenders confidence, potentially resulting in more favorable rates. Properties that value at the lower end of expectations or where the valuer expresses uncertainty might result in higher rates or more conservative lending terms.
Some lenders have specific rate tiers tied to LVR bands. The difference between an LVR of seventy-nine percent and eighty-one percent might move you from a six percent interest rate to six point three percent, costing hundreds of dollars annually despite only a two percentage point LVR difference.
Different Types of Property Valuations
Lenders use various valuation methods depending on the perceived risk of your application and characteristics of your property.
Automated Valuation Models
Automated Valuation Models, or AVMs, use sophisticated algorithms and extensive property databases to estimate value without human inspection. They analyze recent sales of comparable properties, property characteristics like size and age, location factors, and market trends to generate valuations instantly.
AVMs are fast and inexpensive, often costing nothing or under two hundred dollars. They work well for standard properties in active markets with abundant comparable sales data. Lenders typically use AVMs for low-risk applications where borrowers have strong equity positions and excellent financial profiles.
However, AVMs have significant limitations. They can't account for property-specific factors like condition, renovations, or unique features. They struggle with unusual properties or thin markets where comparable sales are scarce. And they can't identify issues like weathertightness problems, structural concerns, or other physical defects that affect value.
If you have a standard property in good condition in an active market and you're maintaining strong equity, an AVM valuation is likely acceptable and saves you money.
Desktop Valuations
Desktop valuations involve a registered valuer conducting research and analysis without physically inspecting the property. The valuer reviews property records and title information, analyzes recent comparable sales, considers location and market factors, and examines photos if available.
Desktop valuations cost more than AVMs, typically two hundred to four hundred dollars, but provide more nuanced analysis by an experienced professional. They're appropriate for moderate-risk applications, properties in reasonably active markets, and situations where recent physical inspections have occurred for other purposes.
Desktop valuations offer a middle ground between the speed and cost of AVMs and the thoroughness of physical inspections, though they still can't identify property-specific issues or verify physical condition.
Full Registered Valuations
Full registered valuations involve a registered valuer physically inspecting your property inside and out. The valuer examines all rooms and areas, assesses construction quality and condition, identifies any defects or maintenance issues, measures key dimensions, takes photographs, and prepares a comprehensive written report with detailed analysis.
These valuations cost more, typically six hundred to one thousand dollars or higher, but provide the most thorough and reliable assessment. Lenders require full valuations for higher-risk applications with high LVRs or complex financial situations, unusual or unique properties, properties with known or suspected issues, high-value properties where accuracy is critical, or situations where substantial equity is being accessed.
If your application involves any complexity or your property has any unusual characteristics, expect a full registered valuation regardless of the additional cost.
Specialist Valuations
Occasionally, properties require specialist valuations from valuers with specific expertise. Lifestyle blocks and farms need rural property specialists, properties with commercial components require commercial valuation expertise, and properties with significant heritage or unique architectural features need valuers familiar with such properties.
Specialist valuations cost more due to the expertise required and the more complex analysis involved, sometimes exceeding fifteen hundred dollars. However, they're essential for accurate assessment of non-standard properties.
What Valuers Look For When Assessing Your Property
Understanding what influences valuations helps you prepare your property effectively and set realistic expectations.
Comparable Sales Evidence
The foundation of property valuation is comparable sales analysis. Valuers identify recently sold properties similar to yours in size, age, condition, and location, then adjust for differences to determine your property's likely market value.
Ideal comparables are very recent sales within the last three to six months, located in your immediate area, similar in size, layout, and construction type, and in comparable condition. The more closely comparables match your property, the more confident valuers are in their assessment.
In markets with frequent sales and many similar properties, finding strong comparables is straightforward. In unique markets or for unusual properties, valuers must make larger adjustments based on professional judgment, which can introduce more variability into valuations.
Property Condition and Presentation
The physical condition of your property significantly influences its assessed value. Valuers note the overall maintenance standard, any visible defects or damage, the age and condition of key components like roofing and heating, evidence of deferred maintenance, and the general presentation and cleanliness.
Well-maintained properties in excellent condition value higher than similar properties showing neglect or requiring significant repairs. While valuers are professionals who can look past surface issues, obvious maintenance problems signal potential deeper concerns that affect value assessments.
Building Quality and Construction
The quality of original construction and any renovations matters considerably. Valuers assess the standard of building materials used, the quality of workmanship in construction and renovations, whether work appears to have been done professionally or as DIY, and compliance with building codes and consent requirements.
High-quality construction with proper consents and professional workmanship supports higher valuations. Substandard work, missing consents for renovations, or evidence of shortcuts in construction raise concerns that depress values.
Location and Surroundings
Location influences property values profoundly. Valuers consider proximity to amenities like schools, shops, and transport, the character and desirability of the neighborhood, traffic levels and noise, views and outlook, and the overall trajectory of the area.
Desirable locations in sought-after neighborhoods support higher valuations than less desirable areas, even for otherwise similar properties. While you can't change your location, understanding how it affects your valuation helps set realistic expectations.
Size and Layout
Property and dwelling size affect value, though bigger isn't automatically better. Valuers consider total land area and how it compares to neighborhood norms, dwelling size relative to land area and neighborhood standards, layout efficiency and functionality, and the number and size of bedrooms and bathrooms.
Properties that are too large or too small relative to neighborhood norms may value differently than typical properties. Unusual layouts or configurations that limit appeal to typical buyers can also affect valuations.
Renovations and Improvements
Recent renovations generally increase property values, but not all improvements add equal value. Kitchen and bathroom updates typically deliver strong value returns, quality flooring and redecorating add moderate value, and functional improvements like insulation and heating add value through improved comfort and energy efficiency.
However, highly personal choices that don't appeal broadly, luxury finishes that exceed neighborhood standards, and poor-quality DIY work might add little value or even detract from it if the quality is questionable.
Provide valuers with information about recent improvements including costs, dates, and whether work was consented and professionally completed. This helps them account for these enhancements in their assessment.
Building Compliance and Legal Issues
Valuers investigate whether the property has any compliance issues, unconsented work, building defects or weathertightness problems, title restrictions or easements affecting use, or outstanding notices from councils or other authorities.
These issues can significantly impact valuations because they represent risks or limitations for potential buyers. Properties with clean compliance records value more favorably than those with known issues.
Preparing Your Property for Valuation
While you can't change fundamental characteristics, strategic preparation helps ensure your property values as favorably as possible.
Complete Minor Repairs and Maintenance
Address obvious maintenance issues before valuation. Fix leaking taps, repair damaged paintwork, replace broken or missing components, ensure all fixtures and fittings work properly, and address any visible signs of neglect.
While valuers understand properties aren't perfect, glaring maintenance issues create negative impressions that might influence how they assess overall condition and therefore value.
Deep Clean and Declutter
First impressions matter even for professional valuers. Thoroughly clean all areas including kitchens and bathrooms, remove clutter to make spaces appear larger, ensure windows are clean for maximum light, tidy outdoor areas and gardens, and remove personal items that might distract from the property itself.
A clean, well-presented property suggests careful ownership and good maintenance, supporting more favorable valuations.
Enhance Curb Appeal
The valuer's first impression begins at the street. Ensure lawns are mowed and gardens tidy, clean driveways and pathways, paint or repair front doors and mailboxes if needed, remove any rubbish or clutter visible from the street, and ensure exterior of dwelling looks well-maintained.
Strong curb appeal creates positive first impressions that carry through the entire valuation inspection.
Prepare Documentation
Gather information that helps valuers understand your property including evidence of recent renovations with costs and dates, building consents for any work completed, reports from inspections or specialist assessments, information about upgrades like insulation or heating, and details of property improvements not obviously visible.
Providing this documentation proactively ensures valuers have complete information when making their assessment.
Be Present But Not Pushy
Consider being available during the inspection to answer questions, but don't hover or pressure the valuer. They need space to conduct their assessment professionally without feeling monitored or influenced.
If you have important information to share about improvements or features that might not be obvious, mention it briefly without overselling. Let the property speak for itself while ensuring relevant positive information is available.
Set Realistic Expectations
Research recent sales of comparable properties in your area to understand what your property is realistically worth. Use online property tools and sales databases to see what similar properties have sold for recently.
Setting realistic expectations prevents disappointment and helps you plan appropriately. If comparable properties suggest your home is worth seven hundred and fifty thousand dollars, hoping for eight hundred thousand might lead to problems during refinancing.
When Valuations Come in Lower Than Expected
Despite best preparation, sometimes valuations come in below your expectations, creating challenges for your refinancing plans.
Understanding Why It Happened
Low valuations occur for several reasons. Market conditions might have softened since you last assessed your property's value, with recent sales showing declining prices. Your property might have specific issues or characteristics that reduce its appeal relative to others. The valuer might have used different or less favorable comparable sales than you anticipated.
Sometimes homeowners have unrealistic expectations based on emotional attachment or optimistic estimates rather than genuine market evidence. Accepting that valuations reflect professional judgment based on market data, not opinions or wishes, helps you respond appropriately.
Immediate Impacts on Your Refinancing
A low valuation affects your application in several ways. Your loan-to-value ratio increases, potentially moving you into a higher interest rate tier or requiring lenders mortgage insurance. The amount of equity you can access decreases, possibly making your intended use of equity impossible or requiring reduced scope.
In severe cases, you might not meet minimum lending criteria at all, requiring you to either accept the reduced borrowing, contribute additional cash to reduce your LVR, or abandon the refinancing entirely.
Options for Responding
You have several possible responses to a low valuation. You can accept the valuation and adjust your refinancing plans accordingly by borrowing less, accessing less equity, or accepting higher rates if your LVR increased.
Alternatively, you can challenge the valuation if you believe it's genuinely inaccurate. Provide evidence of comparable sales the valuer might have missed, document recent improvements or renovations not reflected in the valuation, or request a second valuation if you have strong grounds to believe the first was wrong.
However, recognize that challenging valuations is only appropriate when you have legitimate evidence they're inaccurate. Simply disagreeing with a professional's assessment because you hoped for higher isn't grounds for challenge.
You might pay down your mortgage to reduce your loan balance, improving your LVR despite the lower valuation. If you have savings or can access funds from other sources, reducing your loan amount might salvage your refinancing plans.
Finally, you can delay refinancing and wait for market conditions to improve if you believe current valuations are temporarily depressed. This only works if you're not under time pressure to refinance.
Obtaining Second Valuations
Some lenders will consider second valuations if you're not satisfied with the first, though you'll pay for both. Second valuations make sense when you have strong evidence the first valuation was inaccurate, comparable sales data clearly supports higher values, or the first valuer appears to have missed important information about your property.
However, don't expect dramatically different results without good reason. Professional valuers use similar methodologies and data, so large discrepancies are unlikely unless the first valuation contained genuine errors.
If a second valuation comes in similarly to the first, accept that this likely reflects your property's genuine market value rather than pursuing additional valuations hoping for a different outcome.
Preventing Future Valuation Surprises
To avoid valuation surprises in future refinancing, stay informed about local market conditions and recent sales, maintain your property well to preserve its value, complete improvements with proper consents and quality workmanship, and realistically assess your property's value before planning refinancing based on specific equity requirements.
Working with Lenders Around Valuation Issues
Lenders have some flexibility in how they respond to valuation issues, though their risk management requirements constrain their options.
Negotiating Based on Strong Borrower Profiles
If you have an excellent financial profile with high income, minimal debts, and strong credit history, lenders might show flexibility despite a valuation coming in slightly lower than hoped. They might accept marginally higher LVRs for low-risk borrowers who demonstrate strong serviceability.
However, don't expect lenders to completely disregard valuation results. Their risk management frameworks and regulatory requirements limit how much flexibility they can offer regardless of your financial strength.
Considering Alternative Lender Options
If one lender's valuation or response is unsatisfactory, consider approaching other lenders. Different lenders might accept different valuation methods or have slightly different risk appetites, potentially resulting in more favorable outcomes.
However, recognize that substantially different valuations from different lenders are uncommon. If multiple lenders provide similar valuations, that's a strong indication of your property's genuine market value.
Understanding Lender Constraints
Lenders must manage risk carefully to protect depositors and meet regulatory requirements. Their valuation requirements and LVR restrictions aren't arbitrary obstacles but necessary risk management tools.
Understanding these constraints helps you work with lenders realistically rather than feeling frustrated by what might seem like unnecessary rigidity.
The Role of Professional Guidance
Navigating valuation challenges often benefits from professional advice and support.
How Mortgage Brokers Help
Experienced mortgage brokers understand how different lenders approach valuations and can guide you toward lenders more likely to view your property favorably. They know which lenders use which valuation methods for different scenarios and can position your application to maximize the likelihood of favorable outcomes.
If valuations come in low, brokers can help you explore options across multiple lenders, identify strategies for addressing valuation issues, and negotiate with lenders on your behalf for maximum flexibility within their risk frameworks.
When to Seek Property Expertise
If you're surprised by a low valuation, consider consulting with real estate agents familiar with your area to get independent opinions on your property's market value. They can provide market insights and comparable sales data that either confirms the valuation is accurate or suggests it might be conservative.
For properties with specific issues raised by valuers, property inspectors or building experts can assess whether concerns are valid and provide reports that might influence reconsiderations if issues were overstated.
At Luminate Financial Group, we help New Zealand homeowners navigate property valuation challenges by setting realistic expectations about likely valuations before applications proceed, guiding you on how to prepare properties for favorable valuations, working with lenders who are most likely to view your property positively, and helping you respond effectively if valuations come in lower than expected.
We've guided countless homeowners through valuation processes and know how to position applications for best outcomes while managing expectations realistically.
Concerned about how your property will value for refinancing? Contact Luminate Financial Group for expert guidance. We'll help you understand what to expect, prepare your property effectively, and navigate any valuation challenges that arise.
