An $850,000 refinance with $70,000 for renovations, and a valuation error caught in time.

Two borrowers, both PAYG employees, in a Canberra home valued at $3.5 million. Two children, both in private school. Their existing loan of about $780,000 was sitting on a rate they had stopped paying attention to, and they wanted $70,000 to fund improvements to the house.

Rolling the two together meant a new loan of $850,000. On paper this was the easiest kind of application. An $850,000 loan against a $3.5 million property is under 25 per cent LVR, so there was no lenders mortgage insurance question and no doubt about the security. The real brief was cashflow. School fees for two children are a large fixed cost that rises every year, and they wanted the mortgage to stop competing with it.

Extending the loan term is the standard lever for lowering a repayment, and it is also the one that quietly costs the most. Their existing loan was already part way through its schedule. Writing a fresh 25 year term brought the minimum repayment down straight away, but on its own that just means paying interest for longer.

So the loan was chosen for two features that make the longer term optional rather than permanent. The first is unlimited extra repayments, which means the lower minimum is a floor rather than a plan. The second is an offset account. Every dollar of savings, bonus or short term cash sitting in that account reduces the interest charged on the loan without being locked away where they cannot reach it.

The result is a repayment they can comfortably meet during the school fee years, and a structure that lets them accelerate the loan again the moment those years are behind them.

The valuation came back at $3.5 million, which was never going to be a problem at this LVR. The issue was further down the report.

It set the minimum building insurance at $1.6 million. The same report put the value of the house itself, without the land, at $950,000.

That is not a small gap and it looked like an error. A rebuild can legitimately cost more than the assessed value of the house, because rebuilding involves demolition, professional fees and construction costs that keep rising. It does not cost 68 per cent more.

The consequence of that error would have landed on the clients rather than the valuer. A minimum sum insured goes straight into the loan conditions, so they would have had to go back to their insurer and lift their cover substantially before settlement, then keep paying for that level of cover for the life of the loan. Most borrowers would simply do it. The figure comes from a professional valuation and it arrives as a condition of approval, so questioning it is not the obvious move.

So Shane wrote back to the lender, put the two figures from its own report side by side and asked for the valuation to be sent back to the valuer for review and amendment. The valuer revised it. The requirement came down to $1.3 million, which made the increase the clients had to make $300,000 smaller than the report first demanded.