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What is Loan-to-Value (LTV) Ratio?
A host of factors is considered before the lender approves the requested loan amount - one of the crucial ones being the LTV, meaning Loan-to-Value ratio. The LTV ratio, expressed in percentage, refers to the portion of the property value you are eligible to get as the approved loan amount.
Assume the lender permits an LTV ratio of 70% of the property value. If your property is valued at Rs.1 Crore, you will be permitted to borrow up to Rs.70 Lakh, provided you meet the lender's other eligibility criteria.
Note that this example is explanatory and is not to be relied on for actual LTV calculations during loan preparations.
Additional Read: Understanding Stamp Duty and Property Registration Charges
The RBI’s Guidelines on the Loan to Value Ratio
The Reserve Bank of India (RBI) has a set of guidelines for the LTV ratio on Home Loans.
- Lenders can sanction up to 90% of the property’s value for Home Loan amounts worth Rs.30 Lakh
- Lenders can sanction up to 80% of the property’s value for Home Loan amounts ranging between Rs.30 Lakh and Rs.75 Lakh
- Lenders can sanction only up to 75% of the property’s value if the Home Loan amount exceeds Rs.75 Lakh
How to Calculate the Loan-to-Value Ratio?
Loan-to-value (LTV) ratio can be calculated by simply dividing the loan amount by the value of the asset or collateral being borrowed against it. In case of a mortgage, this amount would be the mortgage amount divided by the property's value. Homebuyers can manually calculate the LTV ratio of a home by using this formula:
LTV = (Amount owed on the loan ÷ Appraised value of asset) × 100
How to Use the Loan-to-Value (LTV) Calculator?
Employing the help of a loan-to-value calculator is an easy way to determine what percentage of your property’s value you stand to receive as a Home Loan. To start with the online LTV Calculator, enter:
- Provide the estimated value of your property
- Select the type of property: residential or commercial
- Enter your own monthly income and obligations
- Select the interest rate you want
- Select your preferred repayment tenor
The calculator window will present the maximum loan amount you are eligible for based on the value of your property and the LTV ratio. This can help you tailor your Home Loan application and play to your strengths, to ensure that you are eligible for speedy approval.
Additional Read: What is a NOC Letter?
What is a good loan-to-value ratio?
If you're taking out a loan to buy a home, the percentage of 80% or less is considered an ideal LTV in Housing Finance. An LTV above 80% is considered to be a high, meaning the borrowers may face higher borrowing costs, require private mortgage insurance, or be denied a loan. Even higher LTVs such as above 95% are considered unacceptable.
Why Loan-to-Value Ratio (LTV) is important?
LTV is an important consideration in your home loan calculations as it determines your future EMIs. LTV in housing finance plays a big role in determining your EMI amount - the higher the LTV, the smaller your EMIs will be. Effectively, higher LTVs means higher amount going out as interest towards your loan. On the other hand, a lower LTV may reduce your EMI.
Whether you're applying for a Home Loan or a Loan Against Property, it's important to understand how your LTV ratio affects overall cost of borrowing, the steps you can take to bring down the LTV, and the money you can save by doing so.
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