LTV Ratio in Home Loan

The Loan-To-Value ratio in a home loan is the proportion of the property value that the lender can lend to a property buyer. The rest should be contributed by the homebuyer from his sources. The home loan LTV ratio is always represented in percentages. Lenders use this ratio to assess the risk associated with any home loan.

The bank or the financial institution checks the LTV ratio for housing loans to lend an amount lower than the property’s actual price. This is to ensure that they can recover the money lent in case of default in payments. A lower LTV ratio in housing loans can get you a better interest rate and terms, whereas a high Loan-To-Value ratio increases the borrower’s perceived risk.

Suppose you are availing of a home loan of Rs. 50 Lakhs from a lender, and your lender is offering you a Loan-To-Value ratio of 70%; you will get a home loan of Rs. 35 Lakhs, and the remaining amount of Rs. 15 Lakhs has to be contributed by you in the form of a down payment.

The Loan-To-Value ratio or LTV ratio is calculated using the formula given below.

LTV Ratio = (Required Loan Amount/Property Value) X 100

Let us take an example. Suppose you are buying a house worth Rs. 50 Lakhs and pay Rs. 10 Lakhs as the down payment. So, you would need a loan of Rs. 40 Lakhs, which is not covered in your down payment. If 20% is the down payment, then the Loan-To-Value ratio for home loans will be 80%. The lending institution uses the LTV ratio to decide the amount of loan it would disburse.

You can use any LTV ratio calculator available online to calculate the value. 

Lenders use Loan-To-Value ratio as a metric to assess the risk associated with the home loan. If the LTV ratio is higher, then the loan is considered riskier. Lenders usually prefer LTV ratios of up to 80% over higher ones. But, some lenders disburse loans on a 90% LTV ratio, considering the borrower’s credit profile, financial worth, and prevailing economic scenario.

If the LTV ratio is higher, the lenders will offer a higher interest rate considering the risk. If the LTV is lower, the monthly instalments or EMI will be lower. It will reduce the financial strain over the tenure of the home loan. 

As the LTV ratio increases, the loan approval becomes harder. If the borrowers invest more of their funds upfront as a down payment, those homebuyers are considered financially prudent borrowers from a lender’s perspective. 

For instance, if you pay Rs. 15 Lakhs as the down payment for a home appraised for Rs. 75 Lakhs, your LTV on an Rs. 60 Lakhs loan will be 80%. The larger your down payment, the smaller your LTV gets. 

The Reserve Bank of India (RBI) has fixed the Loan-To-Value ratio for lenders at 90% for home loans up to Rs. 30 Lakhs. This implies that if the LTV ratio is 90%, you have to pay the remaining 10% of the property value yourself. The rest of the amount can be funded by taking a home loan. 

Take a look at the RBI guidelines over the Home loan LTV ratio. 

Since the LTV ratio is required to compute the minimum down payment you have to make while purchasing a property, it plays a vital role in the approval of home loans.

The home loan approval chances from lenders are high for those who opt for lower LTV ratios. This is because a lower home loan LTV ratio reduces credit risk for lenders. So, to increase your home loan eligibility, it is better to opt for a lower LTV ratio. 

Lower LTV ratios help lower the loan amounts, and as a result, the borrower will get lower house loan interest rates. It significantly reduces the EMI and the overall interest cost. When you apply for a home loan, your lender will inform you about the LTV ratio. If it is not favourable on your side, you can negotiate with the lender for lower interest rates and more.

Here are some tips to lower the LTV ratio for housing loans:

• Pay a bigger down payment: Save up enough before buying or building a new house so that you can make a heavy down payment. This will lower your LTV ratio and increase the chances of loan approval. Also, your EMI and interest burden over the house loan tenure will be lesser.

• Buy an affordable home: Buying an affordable home at a lower price. It means you will have to borrow less money which will lower your LTV ratio in housing loans. Though you may have to let go of your dream home, your current savings will be enough to pay the purchase price.