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Loan-to-Value (LTV) Ratio: Calculation, Benefits & Its Importance
2 mins Read | 1 Month Ago
When planning to buy a home with a Home Loan, understanding key financial terms can help you make informed decisions. One such important term is the Loan-to-Value (LTV) Ratio, which helps determine how much of the property value can be financed through a Home Loan and how much you may need to arrange from your own funds.
Understanding the LTV Ratio can give you better clarity while planning your home purchase. Let us understand what the LTV Ratio is, how it works and why it matters when applying for a Home Loan.
What is Loan-to-Value (LTV) Ratio?
A Loan-to-Value (LTV) ratio in a Home Loan is the percentage of the property value that a bank or financial institution can lend to a property buyer. Lenders are not permitted to lend/finance the full property value, hence, you cannot avail 100% of your property purchase price as a loan.
Banks/financial institutions will examine the LTV ratio before approving a Home Loan, to ensure that they do not lend an amount that is higher than the property’s actual price so they do not breach the prescribed LTV for the type of loan being advanced.
An increase in the LTV raises the borrower’s perceived risk, while a lower LTV ratio can get you better terms, including lower interest rates on your Home Loan. The LTV also protects the banks/financial institutions in case there is any depreciation in the value of the property, since these are longer tenure loans.
How to calculate an LTV ratio
The LTV ratio is calculated by the lenders using the below given formula:
LTV Ratio (%) = Amount Borrowed/Property Value X 100
For example, if you wish to buy a house worth Rs 1 crore and the LTV ratio of your bank is 70%, then the maximum amount of loan that you can avail is Rs 70 lakh.
Mortgage Example of LTV
For example, if you're buying a property worth ₹1 crore and the bank offers an LTV ratio of 70%, the maximum loan amount you can get is ₹70 lakh. The remaining ₹30 lakh must be covered by your own funds, ensuring you have significant equity in the property.
LTV Ratio and Home Loan eligibility
Your eligibility for a Home Loan will depend on the LTV ratio, as applied to the property value. Even if your income permits you to avail a higher loan, a bank will be forced to cap the loan amount based on the defined LTV ratios.
However, you may get better terms on your Home Loan, which includes a better interest rate, if the LTV ratio is low. In conclusion, lower LTV ratios may fetch you lower Home Loan interest rate simply because, the risk associated with lending to you is lower.