When you’re planning to build your dream home or undertake a major renovation, understanding how lenders assess the value of your property is crucial. This valuation directly impacts how much you can borrow and the loan-to-value ratio (LVR) that applies. Two common valuation methods used in construction loans are Land Value + Fixed Price Building Contract and As If Complete Valuation. Let’s break down what these mean and how an 80% LVR might influence your borrowing capacity.
1.Land Value + Fixed Price Building Contract
What is it?
This valuation method looks at the value of the land separately from the cost of construction based on a fixed price building contract.
- Land Value: The current market value of the vacant land.
- Fixed Price Building Contract: The agreed, fixed cost with your builder for constructing your home.
How does it work?
The lender adds these two figures together to determine the total value of your project for lending purposes. This method is often used at the start of the loan process, especially when the land has been purchased but construction is yet to begin.
What to keep in mind:
- The building contract must be a fixed price contract to provide certainty on costs.
- The land value is typically confirmed by a formal valuation or council rates notice.
- This approach helps the lender asse
2. As If Complete Valuation
What is it?
An As If Complete Valuation estimates the market value of the property once construction is fully completed.
- This valuation is performed by a professional valuer who assesses the land and the proposed improvements (the new home or renovations) as if they were already finished.
- It takes into account plans, specifications, and sometimes the quality and location of the proposed build.
How does it work?
- The valuer provides a single combined market value reflecting both the land and completed construction.
- This valuation is often required before construction starts or at specific milestones during construction.
- It gives lenders a realistic picture of the property’s potential value upon completion.
What to keep in mind:
- This valuation can be higher or lower than the sum of the land value and contract price depending on market conditions and build quality.
- It helps lenders determine the maximum loan amount based on the anticipated future value, not just current costs.
How Using an 80% LVR Affects Your Borrowing Power
The Loan-to-Value Ratio (LVR) is a key factor lenders use to decide how much they will lend against your property.
- An 80% LVR means the lender is willing to lend up to 80% of the property’s value (whether that’s the land + contract price or the as-if-complete value).
- For example, if your land value + fixed price building contract totals $500,000, an 80% LVR means you could borrow up to $400,000.
- If the as-if-complete valuation is higher, say $550,000, the 80% LVR could allow borrowing up to $440,000, potentially increasing your borrowing capacity.
Important considerations:
- Using the land value + fixed price contract approach may limit borrowing if the contract price is conservative or the land value is low.
- The as if complete valuation can sometimes provide a higher value, giving you more borrowing power, but it depends on the valuer’s assessment.
- Lenders may have different policies on which valuation method they use, so it’s important to discuss options with your mortgage broker.
Why This Matters to You
Choosing the right valuation method and understanding how LVR works can significantly impact your ability to finance your build or renovation project. It also affects your deposit requirements and loan structure.
As your mortgage broker, we can help you navigate these valuation methods, explain how they affect your borrowing options, and find the best loan solution tailored to your needs.
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Lending criteria, terms, and conditions apply. Eligibility and loan terms vary between lenders. You should seek personalised advice from a qualified mortgage broker or financial adviser before making any borrowing decisions.