When you apply for a home loan, the bank will value the property to determine the market value, right? Wrong!

While it's true that when you apply for a mortgage, your bank will place a value on the property you're buying, the figure they come up with is not necessarily an accurate representation of the property's value.

"Novice property investors often expect a bank valuation to mirror the market price. In fact, a bank valuation is only an internal control tool, which reflects what a bank can reasonably expect to recoup should it need to repossess and sell the property in distressed circumstances. This is why it is less than market price." explains Bernard Kelly from www.retirelaughing.com.

Generally, banks will value the property at the lower end of the scale as they need to protect their risk.

If you stop making repayments and they are forced to sell the property to recover the money they have lent you, they want to be satisfied that they'll be able to cover that debt. They need to factor in extra expenses like real estate commission, legal fees and timelines, so it pays to be cautious in their estimate.

While banks may veer towards conservative values, the valuation put on a property by an insurance company is often above the market value. In this instance, they need to factor in a little "cushion" to cope with inflation/CPI and rising costs of construction.

"As you can see, valuations are tools the big corporates use for their own purposes," Kelly says. "You should always keep in mind that they only loosely relate to the real market price."

Article from Your Mortgage