The Loan to Value or LTV ratio is a term lenders use to determine the value of a loan/finance they can provide to a borrower. An LTV ratio can be identified for loans such as Home Loan, Gold Loan and a few others.
This ratio is used by all Financial Institutions to identify/assess the risk associated with giving a loan to a borrower. It is used to assess how much amount of a loan is given to a borrower based on the Gold they have pledged (subjected to fluctuating gold rates, a buffer is considered) or the home financing the borrower requires. So that the lenders do not lend higher than the actual price of the asset.
How is LTV calculated for a Home Loan?
LTV ratio in a Home Loan means the percentage of the property value the FI can lend to the borrower i.e the loan applicant that has approached them for a loan.
Any FI cannot give a 100 % property loan to a borrower as per RBI guidelines, before lending the FI will analyse the value of the property so that it doesn’t lend the borrower above the property’s value.
An increased LTV increases the borrower's risk while a lower LTV attracts a better interest rate and other benefits.
How is LTV calculated?
To determine the LTV ratio, divide the loan amount by the value of the asset, and then multiply by 100 to get a percentage: LTV = (Amount borrowed ÷ Value of the asset) × 100 = LTV ratio percentage.
For example: If the house is valued at Rs. 50 lakh and your lender’s LTV is 60% then the maximum loan you can get upto Rs. 30 lakh.
RBI guidelines on LTV
RBI states that in the case of home loans for Rs. 30 lakh or less can go up to 90% of the property value. This clearly means that the borrower will have to shell out at least 10% from his pocket for the down payment while the rest amount can be financed by the lender.
For loans between Rs. 30 lakh – Rs.75 lakh, the LTV ratio can go up to 80% while for loans above Rs. 75 lakh, the required LTV ratio is 75%.
LTV Ratio and Home Loan eligibility
Your eligibility for a Home Loan will depend on the LTV ratio. Even if your higher income gets you the benefit to avail a higher loan, FIs will be forced to stick to the LTV ratios as fixed by the RBI.