Loan Against Property Loan To Value

Loan to value ratio or LTV denotes the percentage of a property’s actual price that can be obtained as a loan. It denotes the maximum amount of financing you are entitled to receive against the pledged property. The LTV ratio ranges between 40% and 75% for a loan against property. This ratio can vary depending on whether the pledged property is residential or commercial, and self-occupied, rented, or vacant.

LTV ratio calculation is strictly based on the property’s recent valuation report, which shall not be more than 3 months old. Otherwise, the property must be valued a new to that end. You can obtain an amount lower than what the loan to value ratio tells. Use a loan against property EMI calculator to determine the amount and tenure you are comfortable with to make an informed decision. Besides the highest loan amount eligibility, the LTV ratio is a measure of the perceived risk of lending.'

How is LTV calculated

Loan to value ratio is calculated by taking the maximum amount you are eligible to borrow and dividing it by the pledged property’s appraised value. The result can be multiplied by 100 to express this ratio in percentage.

Take the following table as an example to understand how LTV is calculated.

The highest sum you can borrow against a pledged property is determined based on this calculation. It’s possible to get a lower loan amount as per your requirements. You should note that a lower LTV implies mitigated risk and better loan terms.

What is the LTV Calculation Formula?

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The LTV ratio formula uses two variables, namely, the pledged property’s current market value and the loan quantum you are eligible for. It can be expressed as –

LTV Ratio Formula = (Loan amount/Property’s market value) * 100

For example, suppose a property is valued at Rs.2.5 crore, and you are eligible for a loan amount of Rs.1.75 crore. As per the loan to value ratio formula, LTV ratio will be [(17500000/25000000) * 100] or 58.33%. Usually, the maximum loan amount for which you are eligible can differ for residential and commercial properties. In most cases, a residential property fetches a higher LTV ratio than a commercial property.

You can use the loan against property calculator to get an estimate of the maximum obtainable loan quantum. However, note that several factors and RBI’s guidelines concerning LTV rules are considered for computing the total loan amount you can avail. For instance, the pledged property’s occupancy status is an essential loan to value ratio determinant.

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How to use the loan to value calculator?

The loan to value calculator comprises five fields. These are –

• Employment type
• Property type
• Property value
• Tenure (in months)
• Interest rate

Follow the steps below to use a loan to value ratio calculator:

Step 1.Select whether you are a self-employed or a salaried individual.

Step 2.Choose between a residential or commercial property type.

Step 3.Enter property’s current market value.

You can view the eligible loan amount instantly after inputting these variables. To view the EMI amount, interest payable, and total payable amount, you need to enter a suitable tenure in the mortgage LTV calculator. You can also tune the term as per your convenience to determine an EMI you are comfortable bearing every month.

However, the instalment amount can vary when you actually apply for a loan against property based on your eligibility and applicable interest rate. The LTV ratio calculation can also differ depending on specific factors.

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Factors That Affect LTV Calculation:

LTV ratio calculation is subject to various factors concerning the property itself and the applicant. These three aspects of the pledged property are vital in this respect: 

To calculate a loan to value ratio, lending institutions also check the following factors:

• Credit score – A healthy credit score, preferably above 750, invites a high loan to value ratio and vice versa.
• FOIR – A fixed income-to-obligation ratio within the range of 40% - 50% is conducive to a higher LTV ratio.
• Work experience – A prolonged work experience will attract a more significant loan to value ratio. You can be either salaried or self-employed. 

Your age is also crucial in LTV calculation for home loan and loan against property.

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RBI Guidelines on LTV

The Reserve Bank of India  has capped the maximum LTV ratio for all types of housing loans, including a loan against property, at 90%. It has also rationalised the associated risk weights regardless of the loan quantum in its latest directive, dated 9^th October 2020. The correlation between the loan to value ratio and risk weight as per RBI’s guidelines is shown in the table below.

We cap the loan to value ratio at 75% for a loan against property. The applicable ratio depends on several factors, like property type and occupancy status.

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 Loan to Value Ratio FAQs

1. What is Loan to Value or LTV?

It represents the relationship between the eligible loan amount and the property’s current market value. The loan to value ratio is the highest percentage of your property’s value that a lender will finance. Lending institutions use this ratio for all types of secured financing options, including but not limited to loan against property and home loan. A borrower can obtain any loan amount up to the maximum LTV but not exceeding that.

Lenders check several factors to determine the LTV ratio, including property type, age and location, the applicant’s credit score, income profile, debt-to-income ratio, and work experience. Loan to value is higher for residential properties in most cases. New properties and/or ones located in areas with improved amenities attract more significant loan to value ratios.

LTV meaning is also associated with risk assumed by a financial institution. A low LTV mitigates the risk and vice versa. Thus, an applicant with a 750+ credit score can enjoy a higher loan to value ratio. Individuals with debts not occupying more than 50% of their monthly income also have higher chances to secure a high LTV. Stability in earning is another factor that’s important to attract a high loan to value ratio.

2. How to Calculate ltv for Mortgage loan

The LTV ratio for a mortgage loan is calculated by dividing the available loan quantum by the pledged property’s current value and then multiplying it by 100. It is expressed in percentage mostly. If the eligible loan amount is Rs.1 crore and the mortgaged property’s value is Rs.2 crore, the loan to value ratio is 50%. One may use a loan to value ratio calculator to compute the same.

This online calculator requires three inputs primarily to that end, namely, employment type, property type and its current market value. Select whether you are salaried or self-employed, if the property is commercial or residential, and then enter its latest value to check the loan amount for which you are eligible. Divide that sum by your property’s value and multiply it by 100 to calculate the loan to value ratio for a mortgage loan.

The sum differs based on whether the mortgaged property is a house or a commercial property. Depending on whether it’s self-occupied, rented, or vacant, a house fetches a high loan to value ratio compared to a commercial asset. The LTV ratio for a mortgage loan on a self-occupied property is significantly higher than one that is vacant or rented.

3. What is Mortgage loan to value ratio

Mortgage loan to value ratio measures the correlation between an immovable property’s current price in the market and the loan quantum you can take out against it. This ratio is expressed in percentage. A mortgage loan to value calculator can be used to find out the LTV you are eligible for. The primary factor in this calculation is the property type. Occupancy status is also a vital aspect that influences this ratio. These are directly associated with how sellable an immovable asset is.

A commercial property’s mortgage loan to value ratio is generally lower than a residential property. A rented-out house attracts a smaller mortgage loan LTV than a self-occupied property. However, there can be exceptions. A prospective applicant can input their property type, employment status, and property’s market value in a mortgage LTV calculator to check their eligible loan amount. The ratio is the highest percentage, but an applicant can choose to borrow a lower amount than they qualify for.

Choosing a lower mortgage loan to value ratio improves likeliness of loan approval and attracts suitable terms and affordable rates of interest. The highest LTV for housing loans is 90%, according to RBI guidelines. For a loan against property, it is capped at 75%.

4. How does a second mortgage impact loan to value?

A second mortgage on the same property adds to the previous loan to value ratio. Suppose, you have an existing mortgage loan of Rs.35 lakh on an Rs.80 lakh property. You decide to mortgage the property a second time to borrow a sum of Rs.20 lakh. The LTV ratio was 43.75% in the first case. An additional loan of Rs.20 lakh increases the loan to value ratio to 62.5%. You can use a mortgage loan to value calculator to determine the cumulative LTV you are eligible for.

Taking out a second mortgage on a property is more cumbersome than the first. You can consider a top-up loan from your current lender if you did not obtain the entire amount for which you were eligible in the first case. You can also obtain a new loan on your immovable property. However, the eligibility criteria for a fresh, second mortgage loan are more rigid.

Generally, these criteria include an applicant’s age, credit score, occupation type and status, and the mortgaged property’s current value and age. Current debt-to-income ratio is a crucial criterion in this regard. Ideally, existing obligations should not account for more than 50% of an applicant’s disposable income to be deemed eligible for a second mortgage loan. Nonetheless, it’s wise to use a mortgage LTV calculator to make an informed choice before taking out a second mortgage.

5. What Is a Good Loan-to-Value (LTV) Ratio?

Generally, 75% or less is considered a good LTV ratio for a loan against property. What is considered a beneficial loan to value ratio is also dependent on the type of property mortgaged. An LTV of 75% is ideal for a loan against a residential property. For commercial property, a good loan to value ratio may be 65% or less. In case you are taking out a home loan, an 80% or less LTV ratio is considered ideal. LTV above 80% may require the applicant to secure a private mortgage insurance policy, increasing the total cost of the loan.

A lower LTV ratio can be deemed suitable for individuals looking to secure favourable loan terms. Since the loan to value ratio is directly associated with risk weightage, a lower LTV denotes abated risk for the lender. It results in moderate interest rates and beneficial loan terms. An LTV ratio of 70% may attract a higher interest rate than a ratio of 60%. The interest rate depends on several factors besides the loan to value ratio, such as credit score.

A good loan to value ratio is one that lets the borrower utilise their property’s equity to obtain the necessary loan amount without putting additional stress on their finances.