Falling valuations can leave new-home buyers short at settlement

Buyers who signed contracts for new homes before the property downturn may face a funding gap if their lender values the completed property below its purchase price.

The risk is greatest where months or years pass between signing and settlement, as can happen with off-the-plan apartments, unregistered land and some house-and-land packages. A finance approval obtained near the start of that period may not guarantee that the same loan amount will remain available at completion.

Real Estate Business reported on Friday that falling comparable sales were creating a settlement risk for some buyers. The warning focused particularly on new properties bought at high loan-to-value ratios in markets where prices and investor demand have since weakened.

Consumer Affairs Victoria identifies market volatility as a specific off-the-plan risk: the home may be worth less than the contract price at settlement, potentially making it harder to obtain finance. NSW Government home-building guidance similarly notes that a bank valuation affects the amount a buyer can borrow.

How a valuation shortfall works

A lender generally bases its maximum loan on its accepted valuation, not simply the price written in the sale contract.

Consider a buyer who agreed to pay $1 million and expected to borrow 90 per cent, or $900,000. If the bank later values the completed property at $950,000, a loan capped at 90 per cent of that valuation would be $855,000.

If the buyer has already paid a $100,000 deposit, $900,000 remains due at settlement. With the lender providing $855,000, the buyer must find another $45,000, as well as meeting any other purchasing and settlement costs.

The valuation does not change the agreed purchase price. Unless the contract or the seller permits another outcome, the buyer remains responsible for completing the purchase at the contract price.

Who is most exposed

The risk is not limited to investors. It can affect any purchaser where:

• there is a long delay between exchange and settlement
• the original finance assessment has expired or needs to be updated
• nearby comparable homes have sold for less
• the buyer planned to borrow a high proportion of the property’s value
• interest rates or lending assessments have reduced borrowing capacity
• the contract is unconditional or the finance clause no longer applies.

House-and-land transactions can add complexity because the land and construction may be covered by separate contracts and loans. Buyers should establish which component is being valued, when each loan becomes unconditional and how cost variations affect the final funding requirement.

NSW Fair Trading warns that off-the-plan buyers can receive a property worth less than they paid and recommends obtaining independent legal or other appropriate advice before signing. It also notes that cooling-off and disclosure protections do not provide a general right to abandon a contract merely because market values have fallen.

Do not wait for the settlement notice

A buyer expecting completion should contact the lender or mortgage broker early and ask when the final valuation, credit check and loan documents will be completed. Waiting until the final days before settlement leaves little time to challenge an error, approach another lender or arrange additional funds.

An alternative lender may reach a different valuation, but this is not guaranteed. Changing lenders can also take time and may bring a higher interest rate, lenders mortgage insurance, application expenses or stricter serviceability tests.

Borrowing a higher proportion of the valuation can reduce the cash needed at settlement, but it also increases debt and may add insurance or risk fees. It should not be treated as a simple fix without comparing the long-term repayments and total cost.

If a shortfall appears likely, the buyer should also speak promptly with their solicitor or conveyancer. Options may depend on the contract and could include negotiating with the developer, seeking an extension or examining whether any contractual rights are available. The consequences of failing to settle vary, but can be serious and may extend beyond losing the deposit.

What it means for you

• A pre-approval or early loan approval may not protect you from a lower valuation at settlement.
• Ask for the finance and valuation timetable well before a new home is completed.
• Keep a cash buffer rather than committing every available dollar to the initial deposit and upgrades.
• Obtain legal advice immediately if the lender’s valuation leaves you unable to complete the contract.