Bank valuation Portugal: Why the bank value is often lower than the purchase price

Many buyers of property in Portugal, especially in the Algarve, are surprised when the bank valuation (bank appraisal), which is always carried out as part of a financing commitment, is lower than the agreed purchase price. This often raises the question:
Why does the bank value the property lower than the market seems to value it, and what consequences does this have for financing, equity and the purchase agreement?

In this article, we clarify the background to bank valuations in Portugal, why they have been systematically conservative for years and how you as a buyer can minimise possible risks in advance.

1. What is bank valuation and why is it important?

Before granting a mortgage, a Portuguese bank has the property appraised by an internal or external appraiser (avaliação bancária). The result of this assessment is the basis for:

• the mortgage lending value of the property
• the maximum possible loan amount
• the bank's risk assessment

Important:
The bank does not automatically base its assessment on the purchase price, but always on the lower of the purchase price and the bank's valuation.

Example:

• Purchase price: 500.000 €
• Bank valuation: €450,000

→ Financing is calculated at €450,000, not €500,000.

2. Asking price, market price and bank value - three different things

A common mistake made by buyers is to equate the listing price and market value.

• Asking price: Price at which a property is offered
• Market price: price that is actually achieved (comparative sales)
• Bank value: carefully determined security value for the bank

Banks are not interested in current demand or emotional purchasing decisions, but in the realistically achievable resale value in the event that the loan defaults.

3. Why is the bank valuation often lower?

a) Conservative valuation methods
Portuguese banks have been generally cautious in their valuations for years. They are based on:
• Closed comparison sales
• Historical market data
• Internal risk models
Even in sharply rising markets, such as the current one in the Algarve, bank valuations often react with a delay.

b) Dynamic market vs. delayed database
In popular regions, asking prices often rise faster than:
• Notarial sales data
• Official market statistics
• Internal bank benchmarks
As a result, the bank's value falls short of the current supply level, even if the property is realistically sold.

c) Objective of the bank valuation: security, not market forecast
The bank valuation is not intended to reflect the optimal market price. Its purpose is to secure the loan.
Among other things, the following are evaluated:
• Location, development and building rights
• Condition and build quality
• Comparable properties in the region
• Legal and technical risks
The cost of the assessment in Portugal is usually between €200 and €400 and is a prerequisite for the final loan approval.

4. Concrete implications for buyers

Capital requirements are increasing

If the bank sets a lower value, the required equity ratio may increase:
Example:
• Purchase price: 500.000 €
• Bank valuation: €450,000
• Bank loan-to-value (LTV): 70%
→ loan is based on 70% of €450,000, so the bank only finances €315,000 instead of €350,000.
You would have to contribute more of your own capital to cover the purchase price.

Risk of having to pay the difference out of pocket

If the purchase price is higher than the bank valuation, the financing only covers the lower amount. Without a corresponding reserve, buyers must pay the difference themselves.

Financing or contract risk

If the preliminary purchase agreement (CPCV) does not contain a bank valuation clause, the buyer could be left high and dry if the loan is not approved, or even lose their deposit.

5. What buyers should learn from this

✔ Realistic budget planning with buffer
Bank valuations are often 5 - 15% below the purchase price, sometimes even lower. An equity buffer is absolutely necessary.

✔ Compare several banks or appraisers
Different banks value a property slightly differently; Comparisons can help to get a better deal. Also, not all banks offer the same LTV. Depending on the personal profiles, different banks finance between 60 - 80 % for a second home and up to 90 % for locals / residents. Both aspects taken together can therefore make a decisive difference in case of doubt.

✔ Early financing review
The earlier the financing is realistically calculated, the lower the risk of later surprises. Have a loan checked before looking for a suitable property or in the initial phase, so that it is basically only a matter of the specific amount.

✔ If possible, include a financing clause in the CPCV.
Even if many sellers reject this, try to integrate a financing clause into the preliminary purchase contract. At least in the way that the preliminary contract becomes invalid and the deposit must be refunded if the bank valuation does not meet the required amount.
If there is sufficient buffer and the self-financing share is higher, this is of course not necessary.

The fact that banks often value real estate in the Algarve lower than the purchase price is not a mistake, but part of conservative risk management. For buyers, this has a direct impact on:

• Amount of funding
• Equity capital requirements
• Contract risks up to the loss of the down payment

Those who know the mechanics of bank valuation at an early stage, plan realistically and, in case of doubt, secure the preliminary purchase contract, avoid expensive surprises and create a solid basis for buying real estate in Portugal.