I recently purchased my first IP for $180,000 with expected rental at $270/week (7.8% gross yield) but when quoting for my insurance I find out the bank has had the property valued at $120k.
Is it normal for the bank to significantly value a property for less than what was paid for it? Although no doubt reducing my insurance premiums (I would imagine) I feel it could quite substantially limit my ability to access equity for future borrowing?
I own no other property but now, according to the bank, have a $155k mortgage on a property worth $120k so i’m a little bit concerned.
Any help, details or some explanation on this subject will be greatly appreciated!!
Thanks,
Anthony
Hi Anthony,
Was the $120k the Bank quoted to you the Valuation amount or the Required Insurance Amount? Normally on a valuation there is a figure which estimates the amount you should insure the property for if you had to rebuilt it.
Jacqui
The $120k is the required insurance amount. I was able to get a figure on the ‘entire valuation’ as the bank said so I am assuming it is just for the house itself and does not include the land!
Ok well the Required Insurance Amount can differ greatly from the Valuation.
Imagine if you own a shack on a very expensive piece of land on the coast. The Valuation may be $1.5mil but Required Insurance Amount – $200k ? See what I mean… Required Insurance Amount only takes into the account of rebuilding the house and doesnt include the land value.
morpheusbushy wrote:The $120k is the required insurance amount. I was able to get a figure on the 'entire valuation' as the bank said so I am assuming it is just for the house itself and does not include the land!Morpheus, the bank is not concerned that the land might burn (but it will always be there), it is concerned only with the house which if damaged needs to be rebuilt (on the land). The insurable value is generally either the replacement cost (much higher) or the depreciated value (lower sum), that is the bank wants the existing building to be insured for at least $120k even though it will cost you $150k to build a new house. Also be aware there are other costs that should be covered like demolition, architect/design fees, removal of rubble (if burnt down) etc.
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