As you proceed to buy a house with a home loan you as a borrower come across several criteria set by lenders. These are mostly related to annual income essential to be eligible for a home loan. Besides, minimum down payment to be raised by borrower, good credit score and so on. Furthermore, one of the imperative criteria in home loan is the lender’s maximum loan-to-value (LTV) ratio. Getting confused? Don’t panic! Let’s explain what loan-to-value ratio (LTV) is.
Loan-to-Value Ratio (LTV): What is it?
LTV ratio is the percentage of the property price that a lender can finance through a loan. The banks, housing finance companies, NBFCs use this ratio to weigh up their risk in lending a home loan to a borrower. Most importantly, the intention of using LTV ratio for a lender is to work out that they do not lend a higher amount than the actual price of the property. If LTV increases the risk of borrower defaulting increases. This is a concern for a lender.
Now that you understood that LTV plays a significant role in deciding your loan amount; you must be wondering how you can figure it out. Well, the answer is simple. You have LTV calculators online to help you calculate. To put it in simple words, this calculator assists you unlock one of the most important factors that lenders regard as while deciding a Housing loan. Besides your credit score, repayment history and all the rest; the first thing they consider is the amount of the loan you’re asking for compared to the market value of the property.
Why LTV Matters?
Most importantly, LTV ratio helps lenders weigh up the risk. The concept is simple. The more the lender lends the more risk they’re taking. In case, you are considered a high risk for the lender subsequently it’s harder to get approval for loans. At times you may have to pay more at a higher interest rate.
Most importantly, when you are calculating LTV, you are in all probability dealing with a loan that is secured by some type of collateral. For instance, when you avail loan to buy a home, the loan is protected by a lien on the house (property). The lender can take custody of the house and put it up for sale to foreclose if you fail to pay off the loan.
Loan-to-Value Ratio: Guidelines by Reserve Bank of India (RBI)
RBI has fixed guidelines for financial institutions to consider LTV ratio in case of home loans. For example, any loan of 30 lakhs or less can go up to 90 percent of the property value. When we say 90% LTV it actually means that the borrower will have to pay up at least 10 percent of the property value out of his own pocket as own contribution. However, the rest can the lender finances through the loan. For loans between 30 lakhs and Rs 75 lakhs, the LTV ratio can go up to 80 %. It is better to take the LTV ratio into account to find your minimum down payment amount.
Lower the Loan-to-Value Ratio is Better for Borrower
While you apply for a Home Loan you can know the LTV from the lender. The lower the LTV ratio, the better the interest rates you get on your home loan. With lower LTV percentage you should bargain with your lender for lesser interest rates, higher tenure etc (if needed).
It is important to keep in mind that the lenders don’t really want your property. In simple words, they just want to get their money back. If they only lend up to 80% (or less) of the property’s value, they can sell the property at less than the value to recover their funds. Hence, lending 100% or more puts lenders at higher risk.
This blog aims to make you realise the importance of Loan to Value ratio while buying a dream home. Understand how much of the property value a bank can lend.
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