Loan-to-value (LTV) is inversely proportional to your down payment. So, for a housing loan, if you make a down payment of 20% of the property value, your LTV will be 80%.
But why is the loan-to-value ratio important? It is vital because, on its basis, lenders can assess your home loan eligibility and the risk of lending money to you. In fact, they can approve a loan up to a specific ratio only.
What is a Loan-to-Value Ratio?
In a housing loan, the LTV ratio is a percentage of the property value that the lender can lend to the purchaser-cum-borrower. A lender assesses the ratio before approving a loan request to make sure that they don’t lens an amount higher than the price of the property itself.
A rise in the loan-to-value ratio can increase the lender’s risk of lending. A lower ratio can sometimes help you get lower home loan interest rates and better terms.
How Can You Calculate LTV Ratio?
You can calculate the loan-to-value ratio by using the formula below:
LTV Ratio (in %) = Property Value/ Amount Borrowed × 100
For instance, if you want to buy a home worth ₹1,00,00,000 and the loan-to-value ratio of your lender is 70%, the maximum loan amount that you can borrow is ₹70,00,000.
RBI Guidelines on Loan-to-Value Ratio
As per the guidelines of the Reserve Bank of India, the LTV ratio for housing loans can be a maximum of 90% of the property value if you borrow ₹30,00,000 or less. The ratio can be up to 80% if you borrow up to ₹75,00,000. The maximum limit of the ratio is 75% for loan amounts above ₹75,00,000.
So, if your loan-to-value ratio is 90%, you need to pay 10% of the property value from your savings and can finance the remaining amount using a housing loan. In a way, the ratio can help you calculate the minimum down payment to be made to buy the desired property.
Implications of LTV Ratio for Home Loan Eligibility
Your loan eligibility goes higher if the loan-to-value ratio is lower. In that case, you can borrow a higher loan amount, choose a longer tenure, enjoy better terms and access the most competitive home loan interest rates. That’s because the perceived risk of lending money to you goes down.
You can learn about the LTV ratio from the lender when you apply for the loan. After that, you can negotiate with the lender to offer you the above benefits associated with a low loan-to-value ratio.
A top lending bank in India can finance up to 90% of the value of a property/home you wish to purchase. This makes it easy to buy your dream home since you need not fund the bulk cost of the property upfront. After learning the LTV ratio you qualify for, use the housing loan EMI calculator to check the loan amount and tenure you are eligible for. Also, check the EMI amount payable and make sure that it is affordable.