How will my apartment be valued at the end of my lease?

During our recent Financial Coaching Specialist Group Session, Mortgages 101, some questions were asked about how a Lender would view the value of the Assemble apartments at the time of purchase. Or in other words, if the value of the apartment had increased or decreased compared to other comparable apartments in the area, would a Lender take this into account when Residents apply for a home loan, or will they use the agreed purchase price in the Assemble contract? As this is a key part of the home ownership journey, we wanted to provide as much clarity as possible around this step in the process.

Although we have undertaken extensive forecasting and modelling based on past and current performance of the property market to establish purchase prices that are accurate, it’s not possible to foresee the exact state of the market in 7 years’ time. That is why we have created a level of flexibility within the Assemble Futures model and believe that this provides great comfort in relation to these variables.

Below are some of the questions asked by Residents and our responses to clarify the details:

What if the apartment value goes up or down in the 5 years I am renting? Will the valuation influence how much I have to borrow? 

• Assemble’s pricing is based on market data of comparable quality apartments and a modest growth rate over 7 years to ensure that home ownership stays within reach.
• The amount you can borrow is determined by your personal financial circumstances, your deposit and the valuation of your property by an independent Valuer for the Lender against the contract of sale (purchase) price.

What if the lender values my property for more than the contracted purchase price?

• In the instance the value is deemed higher than the purchase price, the Valuer will most likely take the conservative approach and use the contracted purchase price in the valuation. You’re then able to take out finance based on the contracted purchase price and purchase the apartment. You would then have the option of waiting for a period of time and then drawing additional equity out of the property later (see Example 2.0 below).
• However, if the Valuer decides that there are enough comparable sales to set the value at the higher level then the lender will base your Loan to Value Ratio (LVR) on this higher amount. This will mean that you have the option to borrow a higher loan amount, as long as your income can service this higher amount of debt.

Example 1.0:

Contract (Purchase) Price:

• Contract (purchase) price – $800,000
• 80% LVR based on contract price = $640,000
• Funds required to finalise purchase (exc costs) = $160,000 ($800,000 – $640,000)

Using an increased valuation of property:

• Example of valuation coming in a higher amount – $910,000
• 80% LVR of new valuation: $910,000 x 80% = $728,000
• Funds required to finalise purchase (exc costs) = $72,000 ($800,000 – $728,000)
• Hence, there are additional funds available to borrow if the valuation comes in higher than the contract price.

What is equity and how do I access it?

• The difference between the fair market value of your property and the outstanding balance of any loans on the property can be described as ‘equity’. It’s important to understand however that the amount of that equity that you’re able to access will be dependent on certain things that you will need to discuss with your lender, like whether your income is enough to service the loan amount that you’re requesting when withdrawing that equity.
• Some people use the equity in their property for purposes like further investment or payout of high interest debts. The process to do this means you’re essentially borrowing more money against the value of your property to withdraw additional funds.
• If the Valuer values your apartment at contract price but you believe your apartment value is higher, you will need to wait a few months / maybe a year and then look to refinance your loan, and at that point you could leverage equity.
  • It’s important to keep in mind that ‘clawbacks’ may apply if you leverage the equity in your property. A clawback is standard practice when a loan is refinanced within the first 2 years of settlement and means that the broker (if you used one) must pay back any payments or commissions they received from the lender for the loan.
  • If your plan is to access equity at a later date, to avoid clawbacks, a broker may consider charging an upfront brokerage fee at the time of purchase.

Example 2.0:

Contract (Purchase) Price:

• Initial contract (purchase) price – $800,000
• Initial loan x 80% LVR = $640,000

Using an increased valuation of property:

• New valuation at increased amount – $910,000
• Current loan = $640,000
• New loan: 80% LVR of new valuation: $910,000 x 80% = $728,000
• New loan $728,000 subtract old loan $640,000 = $88,000 equity withdrawn from property

What if the lender values my property lower than the contracted purchase price?

• In the instance the value is deemed lower than the purchase price, the lender will base your Loan to Value Ratio on the valuation – not the purchase price. This means, to finalise the purchase, you’d need to pay more money than you may have anticipated to cover the shortfall.
• Due to the timing of the option to buy within an Assemble contract, Residents can decline to proceed if the valuation does not come in at the pre-agreed purchase price should you not have those additional funds available.

Based on this and discussions with a mortgage broker, I would suggest the following strategy:

• Organise a loan pre-approval and have the valuation done within the 3-month period prior to the end of your Assemble lease, as a loan approval and valuation usually lasts 90 days.
• Then, if you have any concerns with either the loan approval or the valuation, you can either adjust your finance or decline the option to purchase. There is no obligation to proceed with the purchase if you choose not to at this stage.
• You can consider the option to purchase your apartment any time up to the 5 year and 1 month mark, as this is the date on your lease when you must confirm whether or not you will proceed with the purchase.

If you’d like any further clarification on the above, please do not hesitate to contact me [email protected] . We welcome your feedback and are happy to answer any further questions you may have.