One critical factor to consider when applying for a home loan, whether for a new purchase or refinancing, is the Loan-To-Value (LTV) ratio. The LTV ratio determines how much you can borrow from the property’s appraised value. It significantly impacts the loan amount you’re eligible for and the interest rates offered. Understanding the LTV ratio can help you make more informed decisions and navigate your home financing journey more confidently.
What does the loan-to-value ratio mean?
The LTV ratio shows how much of a property’s worth a lender is willing to finance with a loan. It is calculated as a percentage by dividing the loan amount by the appraised value or the property’s purchase price (whichever is less).
How is the LTV ratio calculated?
The LTV ratio formula is as follows:
LTV = (Loan amount / Property value) × 100
A lower LTV ratio indicates that you have more equity in the property, which is favourable for both the lender and the borrower. It can lead to better interest rates, lower monthly payments and reduced risk for the lender.
For example, if you purchase a home valued at ₹50 lakh and your lender provides a loan of ₹40 lakh, the LTV ratio would be 80%. This means the lender covers 80% of the property cost, while you must pay the remaining 20% as a down payment.
How does the LTV ratio affect Home Loan eligibility?
Most lenders in India typically offer loans amounting to 80%-90% of the property’s value through housing loans. Maximum LTV ratio can differ depending on factors such as:
- What type of property are you looking for? A residential or a commercial property? Will it be a luxury property?
- Description of the borrower (someone buying their home or an experienced investor)
- Regulations established by the Reserve Bank of India
Using a Home Loan Calculator allows you to see how different LTV ratios affect your ability to get a loan and your monthly payments. Enter loan amounts and interest rates for tenures to explore various situations and find the right balance for your financial needs.
Ways to Enhance Your LTV Ratio
- Consider boosting your payment amount when buying a property. This can lower the loan-to-value ratio and decrease interest rates and monthly payments.
- Selecting a budget property can lower the loan amount and enhance the loan-to-value ratio.
- Utilise a Home Loan Calculator to assess situations and grasp the impact of your payment amount and interest rates on the LTV ratio.
Summary
The ratio between your loan amount and the value of your home plays a role in obtaining a home loan. Understanding how it works and how it affects your borrowing capacity can help you make better decisions and secure more favourable loan terms.
When calculating scenarios using a Home Loan Calculator, ensure that you strike an equilibrium between your initial payment and the loan sum. Through preparation and a thought-out strategy, you can obtain a Home Loan that matches your financial objectives perfectly.
