What Is Loan-To-Value Ratio In Home Loan And How Is It Calculated?

Among a variety of factors, based on which financial institutions in India lend housing finance to prospective borrowers, is the loan-to-value ratio or LTV. Since this is a crucial factor of one’s home loan eligibility, it becomes important to have a fair idea about the concept and how it affects you as a borrower.

LTV in home loan: Definition

Since home loans typically involve large amounts, banks apply a series of risk assessment tools and methods, to lower the possibility of future defaults. LTV, which can be termed as the ratio of mortgage amount to the appraised value of the property, is one of those tools. In simple words, it is basically the percentage of the property value that the bank will be willing to provide to you, as a home loan, or the proportion of the property value that a bank can finance.

If under its preset norms, a bank has an LTV of, say, 80%, it will provide 80% of the value of any assessed property, as home loan.

It is pertinent to mention here that the bank will not consider the sale value as the worth of the property. As it processes you home loan application, it will send an expert team hired by it to visit the property and arrive at its fair value in the market. For lending purposes, the bank will consider only this value as its real worth and offer a percentage of this amount, as the loan.

Most banks have an LTV of 80% in India. Depending on the credit profile of the borrower and other favourable aspects, banks might sometimes stretch it to 90%. The bank’s LTV ratio will decide the down-payment that the buyer will have to arrange for the purchase.

LTV ratio calculation formula

Expressed in terms of percentage, the LTV ratio is arrived at, by dividing the loan amount to the value of the property.

Financial institutions use the below-mentioned formula to calculate the LTV ratio:

LTV ratio = Borrowed amount/property value x 100

Suppose Ankit Kumar is buying a house worth Rs 50 lakhs. A bank that is willing to offer him a home loan of Rs 40 lakhs, has an LTV ratio of 80% while a bank which agrees to lend him Rs 45 lakhs has an LTV ratio of 90%.

LTV home loan calculation example

Rita Gupta is buying a property from the secondary market in Delhi for Rs 90 lakhs. She applies to a public bank for a home loan of Rs 72 lakhs, as she is aware that banks offer up to 80% of the property value as home loan, while she has made arrangements to come up with Rs 18 lakhs from her own sources. When the bank sends its technical team for the property inspection, it reports the fair market value of the property to be only Rs 80 lakhs and not Rs 90 lakhs, at which Rita is actually buying the property.

As the bank will only lend 80% of the house’s cost, Rita would get Rs 64 lakhs (80% of Rs 80 lakhs) and she would have to arrange Rs 26 lakhs out of her own funds. In this case, Rita could either move to another lender that has a higher LTV of 90% or arrange the money on her own.

Impact of LTV on home loan eligibility

Banks keep a low LTV ratio to protect themselves against defaults. A buyer who has invested very less money in a home will have a higher propensity to default. A borrower who has a great deal to lose, would do everything in his capacity to maintain regular payments. This is also why banks are more willing to lend to borrowers who have enough savings to finance a significant portion of the property value.

RBI norms on LTV ratio

Under the guidelines laid by the Reserve bank of India, financial institutions might offer 90% LTV ratio in case of homes worth less than Rs 30 lakhs. This has been done with an aim to promote affordable housing in the country. Banks also offer higher LTV to staff members and buyers who are purchasing in a unit in a project where the bank is a partner.

In case of loans between Rs 30 lakhs and Rs 75 lakhs, the LTV ratio can go up to 80%. For loans above Rs 75 lakhs, the required LTV ratio is 75%.

FAQs

What is LTV ratio?

LTV ratio is the portion of the property value that a bank can finance. This ratio is used by banks and housing finance companies to lower default risk.

How much money can I get as home loan?

Banks generally provide 80% of the total value of a property as loans. In some cases the LTV ratio may be as high as 90%.

Is it better to pay a larger down payment?

In case you savings allow you to pay more than the minimum down-payment, you should do that by all means. That way, you will make several gains.

Check out PropGuide's comprehensive guide to real estate terms here.

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