From credit score to income to age, there are a lot of factors that determine your home loan eligibility. One such important factor is loan-to-value ratio or LTV.
What is loan-to-value ratio?
Loan-to-value ratio is the ratio of the loan value to the cost of the asset being financed through the loan. This figure is multiplied by 100 to arrive at the percentage value.
When represented as a formula it looks like this:
LTV Percentage = (Amount of loan being sanctioned / Cost of the asset) X 100
This ratio signifies the maximum amount of loan that can be approved by the lender for buying a property. The remaining amount has to come from the borrower.
To make it more clear, if the value of the property is Rs 50 Lakh and the LTV allowed by the lender is 75%, then you can get a loan approved of Rs 37.5 Lakh.
Who sets the maximum limit for LTV?
Being the regulator for all banks and housing finance companies, the Reserve Bank of India sets the maximum LTV for various categories of loans. These include:
- For loans up to Rs 30 Lakh, the maximum LTV allowed is 90%
- For loans between Rs 30-75 Lakh, the LTV allowed is 80%
- For loans above Rs 75 Lakh, the LTV allowed is 75%
However, this is just a guideline set by the apex bank. The LTV also depends on your credit score, age, income, and other loans already being serviced by you.
Understanding the importance
LTV ratio is put in place to restrict the risk assumed by the lender in lending the amount to the borrower and in case of a slide in property prices. It also shows the commitment on behalf of the borrower towards owning the asset.
The LTV also plays a big role in determining your EMI amount. The higher the LTV, the smaller will be your EMIs. You might also have to go in for a longer tenure to keep your EMIs smaller. Effectively, higher LTVs translates into the higher amount paid as interest towards your loan.
On the other hand, going in for a lower LTV helps reduce your EMI by offering you a leeway to negotiate for better terms on interest rate or a tenure. However, you will need to arrange for a higher amount upfront.
All said and done, it is very important to consider LTV in your home loan calculations as it forms an important determinant of your future EMIs.
