Loan To Value Ratio

All You Need to Know About Loan-To-Value (LTV) Ratio

3 minutes, 37 seconds Read

Loan to value, or LTV, is a measure of how much money you can borrow in relation to the market worth of your property. The LTV ratio typically varies from 60% to 70% of the appraised value of your property.

Introduction

LTV for a loan against property indicates the maximum amount of finance you can obtain on your property. Here, the property is valued based on various elements, including its occupancy and nature (commercial or residential). The suggested maximum loan amount can be calculated using the loan-to-value calculator. 

Financial institutions and other lenders evaluate the loan-to-value (LTV) ratio before sanctioning a loan as a measure of lending risk. Loans with high LTV ratings are considered to be riskier. So, the loan has a higher interest rate if the mortgage is authorised.

RBI Guidelines on LTV

For loans less than 30 lakh LTV ratio limit is set at 90%
For loans between 30 lakh and 75 lakhs LTV ratio limit is set at 80%
For loans worth more than 75 lakh LTV ratio limit is set at 75%

The loan-to-value ratio determines how much down payment you’ll need when purchasing a home or piece of property. So, if the LTV ratio is 90%, you will need to put down at least 10% of the purchase price, with the remaining 90% coming from a mortgage. To calculate the loan-to-value ratio in a matter of seconds, use the loan-to-value calculator – a free-to-use tool available on the websites of reputed lending institutions like Fullerton India.

What Is a Good LTV?

A decent lender’s average loan-to-value (LTV) ratio is 80%. Anything less than this number is much better. If the LTV increases above 80%, borrowing costs may increase, or borrowers may not be approved for loans.

Loan to Value Ratio Meaning

The loan-to-value or LTV ratio indicates the percentage of a property’s value that a lender can finance with a loan. This ratio is used by financial institutions (banks, housing finance businesses, non-banking finance companies) to assess the risk of approving your loan against property.

Lenders primarily use the LTV ratio to ensure they don’t lend more than the property is worth. As a result, the likelihood of a borrower default increases as a lender’s LTV increases.

How is LTV Calculated?

Simply taking the loan amount and dividing it by the value of the asset or collateral will result in the loan-to-value (LTV) calculation. 

The loan amount is subtracted from the property’s value, expressed as a percentage, to determine the LTV ratio.

Financial institutions use the following calculation to determine the LTV ratio:

LTV ratio = Principal amount/market value of the property

Benefits of Loan-to-Value Ratio to the Borrower

If the LTV ratio is lower, your loan eligibility will be better. A low LTV ratio also increases your chances of obtaining a loan with better terms, including the interest rate. When you apply for a loan, your lender will let you know your LTV ratio. If it’s on the low side, you can negotiate with the lender to get better terms—lower interest rates, a longer payback period, etc. Lower LTV ratios may result in lower interest rates because the risk involved in lending to you is lower.

Benefits of Loan-to-Value Ratio to the Lender 

The loan against property eligibility must be capped at 75% to 90% per RBI criteria for lenders. These restrictions shield the lender from potential property price drops and the possibility that the borrower won’t be able to make future loan payments of the agreed-upon equal monthly instalments.

Analysis of the LTV Ratio

An effective indicator for categorising debtors is loan-to-value. Although it is not the only factor used to determine high-risk borrowers, it offers some insight into a loan’s credit risk. It also determines how much interest the borrower will be required to pay. If the loan-to-value ratio is higher, the loan will cost more.

The following factors affect the loan-to-value ratio:

  • Equity investment by the borrower
  • Cost of purchase
  • Estimated property value

Low loan-to-value ratios occur when the appraised value is high and the denominator is large. It can also be decreased by lowering the selling price and increasing the borrower’s ownership stake.

Conclusion

Choose a reliable and reputed lending institution like Fullerton India, to get a loan against property at the best rates. Remember to use the loan-to-value calculator to assess the value of your property and keep the required loan against property documents before applying.

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