Question: We are in the process of purchasing a property from my parents. Due to fortunate circumstances we are able to purchase the property at a price considerably below the market appraisals that my parents have sought. These market appraisals were given by three separate real estate agencies. My question is, will our lenders mortgage insurance be calculated on the value of the house (determined by the lender’s valuers) or the purchase price of the property?

Answer: When lenders are valuing a property for mortgage security purposes, the general rule of thumb they use is to take the lower value of either the valuation they have conducted, or the purchase/contract price. If your house is valued at $350,000 and you are purchasing it for $315,000, then the lenders will take $315,000 as the value of the property. This is to minimise their risk against either inflated sales prices or inflated valuations.

You might be able to have the lender revalue the property after settlement and then conduct a ‘loan variation’ on your loan to have it secured against the new ‘market’ value. You may then be able to ask for a refund of a portion of the mortgage insurance, as the insurance premium will be less if the lender values your property at a higher amount.

Based on which lender you use, another valuation may cost between $175 and $300 and the loan variation may cost another $100 to $400.