As a part of the loan application process, the lender will engage an independent company to undertake a valuation of your proposed property. They will only lend based on the result of this valuation.
You may have a contract to buy a property for $430,000 and are seeking to borrow 95% of the value or $408,500. If an independent valuation company agrees that the value of the completed property is $430,000, then the lender may be happy to lend you the full $408,500.
But if an independent valuation company believes that your newly completed property is worth only $400,000 then the lender will only lend you 95% of this valuation, that’s $380,000.
The difference of $28,500 needs to be made up elsewhere, either from cash or an increase in your other established loans.
A bank valuation is different from an individual engaging a valuer to provide a market value appraisal. A bank valuation is done on a fire sale basis, so that the lender will know what they could sell the property for at a minimum tomorrow if need be.
It is not unusual for a bank valuation to be 10% less than a market value appraisal for the same property. A low valuation is not necessarily cause for concern as valuers are very conservative at the best of times, even more so in the current environment.
In an established area, a valuer can base their estimate on recent sales that have taken place. But in a new development, where there are no recent sales to go by, the valuer needs to make some assumptions about the type of property that is being built and its value at completion.