A home is likely the largest investment you will ever make, and most people go into the process mindful of how stressful it can be. It goes far beyond simply finding the perfect property, there’s stress about spending in the run-up and the mortgage approval process.
Purchasing a house is a stressful process, and it can be daunting – even for experienced buyers. There’s an extra layer of complexity for first-time buyers though, and that means lots of questions, particularly around building inspections and mortgage approvals.
What is a bank valuation inspection?
A bank valuation inspection is simply a home inspection for a mortgage carried out by a property valuer. It’s a thorough visual inspection to assess the property for sale and is arranged by the bank to protect their interests. It is carried out by a property valuer who is qualified to perform a detailed inspection and make an accurate assessment.
The bank’s valuation inspection will be considering and reporting back to the bank on the condition of the property “as-is” on the day. They will be taking measurements, making notes, and taking photos for the bank’s records. The bank valuation inspection will look at the land, the dwelling and any other site improvements like pools and landscaping. The valuer will look at the condition and quality of all aspects of the property and make a comparison to other properties in the area.
Bank’s valuation inspection versus pre-purchase building inspection
A market valuation is what sellers and buyers use to determine the value of the property and they are typically higher than a bank valuation. They are reflective of the market.
A pre-purchase building inspection and pest inspection forms part of the property purchase contract. There should be a building and pest clause in any property purchase contract – this allows you to have an inspection completed and pull out of the purchase if something serious is found.
Your independent pre-purchase building inspection report details the condition of the property and is not a valuation of the property. Your pest inspection will ensure there aren’t signs of a current pest infestation or prior damage due to an earlier infestation. Both these reports allow you to make an informed decision about whether you are prepared to pay the asking price for the property in its current state. This is a necessary part of the due diligence required when purchasing a property.
Your building inspector will use the latest tools and technology to uncover any issues hiding beneath the surface. Inspectors look at the property’s structure and overall build, noting any issues including signs of dampness, subsidence, cracking, compliance issues, wood rot etc. Your inspector will document their evidence in writing and with photos.
A bank valuation is unlikely to align with the building inspection and the price you pay. A bank valuation is calculated using the LVR or loan-to-value ratio, influencing the borrowing amount. The higher the LVR, the more at risk you are to interest rates because you are borrowing more.
Bank valuations consider several factors including comparable prices in the area and the property’s condition. If, after their inspection and research, the bank deems a property value lower than the purchase price, you must find additional funds to complete the purchase. You may also need to take mortgage insurance from the lender. Just because you think the property is worth the price on the contract does not mean the bank will hold the same opinion.
Essentially, the bank valuation is for the lender to calculate risk and determine whether a loan is too risky or not.
Do mortgage lenders require a home inspection?
Not technically, but that doesn’t mean a mortgage lender won’t request the building inspector report to ensure they are lending money to someone capable of making solid financial decisions. Ultimately, banks avoid lending to people with a track record of making poor financial decisions and choosing to purchase a property without an inspection is considered unwise. This is evidenced by what the big four banks have to say on the matter.
Australia’s biggest banks recommend having a building inspection carried out – at least before settlement day. Trying to avoid the additional expense of a building inspection could cost you much more down the track – especially if you discover you’ve unknowingly purchased a property that needs major repairs.
You don’t normally need to provide the bank with the report. That doesn’t mean a bank won’t recommend an inspection or order their own inspection. If a valuer has raised the alarm about the state of a property, they can and will take this step. The resulting building inspection report can impact whether a mortgage is approved. If the inspection uncovers a defect that greatly reduces a property’s value, the bank may pass on extending a mortgage loan. In this case, the loan office or mortgage broker can advise you on the next steps.
The biggest banks also recommend carrying out a pre-settlement or final inspection. This is slightly different to the standard building inspection, but it will ensure the property is still in the same condition as when you first viewed it. The purchaser and the estate agent generally carry out this inspection, but a professional inspector can also complete the task.
A professional building inspection is the best way to get a complete picture of the property you intend to buy. It will enable you to make an informed decision about the sale. In addition, providing a copy of the report to your bank may bolster your chances of receiving a loan. Most major lenders expect it to form part of your application so be sure to book in your inspection early.