Short answer: the lender works out how much it will lend from the lower of the price you paid and the valuation. If the valuer says the place is worth less than you agreed to pay, your loan shrinks and the difference has to come from somewhere else, usually your own savings. You can sometimes get the valuation reviewed, try a different lender, borrow a bit more with lenders mortgage insurance, or renegotiate the price. Which of those is open to you depends a lot on where you are in the purchase.

It happens more than people think, and it's rarely anyone's fault. Here's how it works and what we'd look at first.

How the shortfall is worked out

Say you agree to pay $1,500,000 and planned to borrow 80 per cent, so $1,200,000, with a $300,000 deposit. The valuation comes back at $1,400,000.

The lender now applies its 80 per cent to $1,400,000, not $1,500,000. The most it will lend without mortgage insurance is $1,120,000. You still owe the vendor $1,500,000, so you need $380,000 of your own money instead of $300,000. That $80,000 is the valuation shortfall.

The gap is never just the difference in value multiplied by one. It's the difference plus the lost borrowing on it, which is why a $100,000 drop in valuation turned into an $80,000 cash problem rather than a $20,000 one. Stamp duty doesn't fall with the valuation either. It's charged on the price you paid.

Why valuations come in low

A bank valuation is not a guess at what the property would fetch on a good Saturday. It's a cautious figure the lender uses to measure its risk if it ever had to sell. Valuers lean heavily on recent comparable sales, and a few situations make those hard to find:

  • A rising market. Sales from three months ago may not reflect what buyers are paying now, and valuers can be slow to catch up.
  • Unusual homes. Federation and heritage houses on the Upper North Shore, waterfront and view properties around Seaforth, Clontarf and Manly, and anything substantially renovated rarely have a true like-for-like sale nearby.
  • Desktop valuations. Done from data, without anyone walking through. Fine for a standard unit, less reliable for a house where the renovation or the outlook is half the value.
  • Paying up at auction. If two bidders wanted it badly, the price can sit above anything a valuer can justify on paper.
  • Off-the-plan. The valuation happens near completion, often years after you signed, and the market may have moved.

Your options

1. Ask for the valuation to be reviewed

Most lenders will reconsider a valuation if you give them a reason to. That means recent sales of similar homes nearby that the valuer may have missed, or features they didn't account for: a renovation, a second bathroom, an extra car space, development approval. A review isn't guaranteed to move the number, and a vague "we think it's worth more" won't get far. Specific comparable sales are what count.

If the first valuation was a desktop one, asking for a full inspection sometimes closes the gap on its own.

2. Try a different lender

Lenders use different valuation firms, and two valuers can land a fair way apart on the same house. Taking the application elsewhere is a legitimate option, but it means another credit enquiry and more time, which you may not have. A broker can often get a valuation ordered with a second lender before you formally apply there, so you know whether it's worth switching.

3. Put in more of your own money

Straightforward if you have it. Some buyers use savings they'd set aside for furniture or a buffer, others get help from family as a gift. Lenders will want to see where the money came from, and a gift usually needs a signed letter confirming it doesn't have to be repaid.

4. Borrow more and pay LMI

In the example above, borrowing the original $1,200,000 against a $1,400,000 valuation is an LVR of about 86 per cent. Many lenders will do that, with lenders mortgage insurance added. LMI can be a meaningful cost, but sometimes it's cheaper than losing the property or your deposit. Our guide to LMI explains how it's priced. A family guarantee is another way to cover the gap without LMI, if a parent is willing and able.

5. Go back to the vendor

If you bought by private treaty and you're still inside the cooling-off period, you have some leverage. A low valuation is a reasonable basis for asking the vendor to come down, and some will rather than start again. It doesn't always work, but it costs nothing to ask.

6. Walk away, if you still can

In NSW, a residential private-treaty purchase normally comes with a five business day cooling-off period. If you pull out within it, you forfeit 0.25 per cent of the price, which is far less than losing a full deposit. NSW contracts don't usually carry a finance clause the way some other states' do, so cooling-off is often the main safety net. Your conveyancer or solicitor can tell you exactly where you stand under your contract.

At auction there's no second chance

Buy at auction in NSW and there's no cooling-off period. Once the hammer falls, the contract is unconditional, and you'll be expected to settle whatever the valuation says. That's the situation people most want to avoid.

The way around it is to get the valuation done before auction day. Some lenders will value a specific property as part of a fully assessed pre-approval, so you know what they'll lend on that house before you bid. It's worth setting a personal limit with any valuation gap already accounted for. We go through the rest of the auction process in buying at auction: finance before you bid.

If you're refinancing rather than buying

A low valuation hurts differently on a refinance. There's no contract to lose, but your LVR goes up. That can mean paying LMI to switch, a smaller cash out than you'd planned, or a lender that won't take the loan at all. You can still ask for a review or try a lender that uses a different valuer, and it's worth knowing the figure before you start. How much equity can I use walks through the sums.

How to lower the odds of it happening

  • Look at recent sales in the street and the surrounding few blocks yourself. If you're about to pay well above anything that's sold, expect the valuer to notice.
  • Get a property-specific valuation before auction, not just a pre-approval on your income.
  • Keep a buffer on top of your deposit and costs. Even 5 per cent of the price gives you room to absorb a small gap.
  • For unusual homes, ask for a full inspection rather than a desktop valuation from the start.
  • Pull together evidence of anything the valuer might miss: renovation costs, plans, council approvals.

Buying on the North Shore or Northern Beaches?

Valuation gaps come up for our clients most often on character homes in Lindfield, Killara and Pymble, view properties around Manly and Seaforth, and freshly renovated houses in suburbs like Frenchs Forest, where the price has run ahead of the sales history. We can usually see it coming, and we'd rather have the conversation before you bid than after. Get in touch or call 1300 001 755.

Frequently asked questions

What happens if the bank valuation is lower than the purchase price?

The lender bases its loan on the lower valuation, so you can borrow less than planned. The difference, called a valuation shortfall, usually has to be covered with extra savings, a higher-LVR loan with LMI, or a lower price.

Can I challenge a bank valuation?

You can ask the lender to review it. The request is much more likely to succeed if you provide recent sales of comparable homes nearby or show features the valuer missed. A review isn't guaranteed to change the figure.

Can I pull out of a purchase if the valuation comes in low?

In NSW, private-treaty purchases usually have a five business day cooling-off period, and withdrawing within it costs 0.25 per cent of the price. Auction purchases have no cooling-off period. Check your contract with your conveyancer or solicitor.

Do different lenders value the same property differently?

They can. Lenders use different valuation firms, and valuations of the same home can vary. Trying another lender is a legitimate option, though it adds time and a credit enquiry.

Is stamp duty based on the valuation or the price?

In NSW, transfer duty is calculated on the price you pay (or the market value if that's higher), not on the lender's valuation, so a low valuation doesn't reduce it.

How do I avoid a valuation shortfall at auction?

Get the lender to value the specific property before auction day as part of a fully assessed pre-approval, and set your bidding limit with any likely gap already accounted for.

General information only. It does not take your objectives, financial situation or needs into account, and it is not credit or financial advice. Lender policy, rates and eligibility change regularly and vary between lenders — talk to us about your own circumstances before acting on anything here.