Bank of Canada Paused the Policy Rate at 2.25%
Appraisal
An appraisal is an independent, professional opinion of a property’s market value on a given date. Mortgage lenders rely on it to confirm a home is worth the price and to set how much they will lend, since the loan is secured against the property.
Appraisal Quick Facts
- An unbiased professional opinion of market value
- Used by lenders to confirm value and set the loan
- Completed by a qualified, designated appraiser
- Different from a municipal assessment or a market analysis
- Usually paid by the borrower, but ordered for the lender
Best Mortgage Rates
What Is an Appraisal
An appraisal is a qualified appraiser’s opinion of a property’s value, based on research and analysis rather than a quick estimate. In Canada, it is usually prepared by a member of the Appraisal Institute of Canada and follows national standards.
An appraisal differs from a municipal property assessment, which is used for property tax, and from a real estate agent’s comparative market analysis. A lender orders a home appraisal, and the borrower often pays the fee, but the appraiser’s client is the lender.
Why an Appraisal Matters for Mortgages
Since a mortgage secures the property, the lender needs to know its value. The Appraisal Institute of Canada explains that “An AIC-designated appraiser offers an unbiased opinion of value,” which the lender uses to confirm the price and set the loan amount.
If an appraisal comes in below the purchase price, the lender bases the mortgage on the lower value, and the buyer may need a larger down payment to cover the gap. A strong, well-supported appraisal protects both the borrower and the lender from overpaying or overlending.
Common Appraisal Approaches
Appraisers use one or more standard approaches depending on the property.
Direct comparison approach: The appraiser forms an opinion of value by analyzing recent sales of similar properties. This is the most common method for appraising residential properties.
Cost approach: The appraiser values the land and the building separately, then adds them together, adjusting the building for depreciation. This appraisal method works best for newer properties.
Income approach: This appraisal method is used for income-producing properties. It converts expected rental income into a value estimate.
When you agree to buy a home for $600,000, your lender may require an appraisal. If the appraised value comes back at $580,000, the lender lends against $580,000, not the purchase price you agreed on. You would need to cover the $20,000 difference, usually with a larger down payment.
Common Mistakes and Misunderstandings About Appraisals
- Confusing an appraisal with a municipal property assessment
- Assuming the appraisal always matches the purchase price
- Treating a market analysis as a formal appraisal
- Believing the borrower who pays is the appraiser’s client
- Expecting an appraisal to flag every repair like a home inspection
We’re curious…
Are you a first-time buyer?
Frequently Asked Questions (FAQ) About Appraisals
What is the difference between an appraisal and a home inspection?
An appraisal estimates a property’s fair market value for the lender. A home inspection assesses the condition of the home for the buyer. They serve different purposes and are done by different professionals.
Who pays for the appraisal?
The borrower usually pays the appraisal fee, but the appraiser’s client is the lender, who relies on the report to make the lending decision. The appraisal report must conform to the lender’s real estate lending audit requirements.
What happens if the appraisal is lower than the purchase price?
The lender bases the mortgage on the lower of the appraised value or the purchase price. You will need a larger down payment to cover the difference, or you can try to renegotiate the price. If you’re putting down less than 20%, your lender may also offer the option to change default insurers to confirm the purchase price using a desktop appraisal (property valuation tool).
How is a home appraised in Canada?
A qualified appraiser inspects the property and applies standard approaches, most often comparing recent sales of similar homes, to reach an opinion of its fair market value.
Is an appraisal the same as a property assessment?
No. An appraisal is an independent opinion of fair market value for a transaction or loan. A property assessment is a municipal value used to calculate property tax.