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PHOTO: Mortgages. FILE

A property valuation is an essential part of obtaining a mortgage as it provides a clear picture of how much a home is worth. Banks and other financial institutions have different ways of going about this process, but the goal is to make sure that they provide borrowers a home loan that matches their needs and financial situation, and in the event of a default, they can recoup the loan amount.

Here are four ways banks and other lenders in New Zealand determine a property’s value for a mortgage.

1. Automated valuation model (AVM)

The most common way lenders determine a home’s market value is by getting an automated valuation model (AVM) report. This method uses artificial intelligence (AI) to calculate the estimated value of a property by looking at comparable sales in an area. It factors in the land size, different home features, distance from these comparable properties, and when these houses were sold.

Typically, an AVM also provides an estimation of how accurate the generated report is – a metric called forecast standard deviation. If a report is deemed inaccurate, lenders often enlist the services of a professional valuer to conduct an independent valuation.

There are two major panel valuation services providers in New Zealand – CoreLogic, which offers the E-valuer report, and Valocity, which generates the iVal report.

2. Registered valuation (RV)

Using registered valuers is considered the most accurate and reliable way of understanding a property’s market value as it utilises trained professionals with deep knowledge of the real estate market and is updated with the latest trends and legislation. With this method, a professional valuer conducts a full inspection of the home and assesses comparable sales in the neighbourhood. They then send a compre

A registered property valuation, however, is the most time-consuming and expensive approach, often taking up to five working days and costing between $900 and $1,000, which comes on top of the purchase price. There can also be instances when it can set borrowers back up to 0.1% of the property’s value.

3. Capital value (CV)

Local councils enlist the services of an independent valuation service provider to determine how much they should charge in annual rates. This is typically done every three years. This is how capital value is set. Capital value, also referred to as rateable value (RV) or government valuation (GV), is the value at which a property would have likely sold at the time of a council’s last valuation.

Several factors are considered when working out a home’s CV, including property type, land size, location, zoning, renovations, and developments and relevant property sales in an area around the time of the valuation. The next revaluation in the Auckland region was supposed to take place last year but was moved to October this year because of the pandemic.

Most banks in New Zealand do not allow CVs to be used when assessing a home loan application. For lenders that do, mortgage approvals are often for low amounts.

4. Purchase price

For homeowners who recently bought a house and are planning to top up from that property, most lenders accept a property’s purchase price as a valuation. However, the home must not be bought via a private sale. Each bank may also have different lending policies. For some, LVR limits are imposed for residential properties that are considered not standard, such as small apartments.