Understanding Loan-to-Value (LTV) Ratio: A key metric for your home loan
When applying for a home loan, an important factor that determines the eligibility of the loan and its terms is the Loan-to-Value (LTV) ratio. It has a direct impact on the amount of loan that you are eligible to borrow. It also affects the interest rate you have to pay over the tenure of the loan.
The Indian home loan market is expected to see growth at a CAGR of 15-20% till the year 2030. As the industry grows, there’s a greater need to understand the meaning and implications of the LTV ratio. If you are thinking about taking out a home loan, understanding the LTV ratio will help you secure the best loan terms.
What is Loan-to-Value (LTV) ratio?
The Loan-to-Value (LTV) ratio is the percentage of the value of the property that a bank or lender lends to a property buyer. It is an important metric in a home loan that helps lenders analyse the risk of a loan.
How to calculate Loan-to-Value?
Knowing how to calculate Loan-to-Value ratio is important not just for loan approval but also for evaluating potential property investments. Here is how lenders calculate Loan-to-Value ratio:
LTV Ratio = (Loan Amount ÷ Property Value) × 100
For example, if your property has a market value of ₹1 crore and the approved loan amount by the lender is ₹70 lakh, then the LTV ratio of your property will be 70%.
Lenders use the LTV ratio to calculate the risk that they are taking. A higher LTV ratio means that the amount of risk the lender is undertaking is higher. Conversely, a lower LTV ratio means a lower risk profile for the lender.
RBI rules for the LTV Ratio for home loans
LTV indicates the portion of a property's worth that a bank or lender lends to a borrower. With a 70% LTV, the buyer needs to pay 30% of the property's worth, with the remaining amount being funded by banks or lenders. The Reserve Bank of India (RBI) is the sole authority that forms policies, rules, and regulations for banks and lenders. The RBI has set the following LTV ratios for home loans:
| Home Loan Value | LTV Ratio |
|---|---|
| ₹30 lakh or less | Up to 90% |
| ₹30 lakh to ₹75 lakh | Up to 80% |
| Above ₹75 lakh | Up to 75% |
How does LTV ratio affect home loan eligibility?
The LTV ratio helps to determine the interest rates that are offered, as well as the terms of repayment. Here’s why the loan to value ratio is important when taking a home loan:
1. Determines your loan eligibility
Lenders set LTV limits to manage risk. When a property’s LTV is too high, there are higher chances of the loan application being rejected. A home loan typically has an LTV ratio of up to 90%, the exact ratio depends on the loan amount and property’s value.
2. Affects your down payment for home loans
When you apply for a home loan, lenders won’t provide you with a loan amount that is equal to 100% of your property’s market value. They set the LTV ratio at a certain limit so that borrowers make a down payment of a percentage of the total home cost. For example, if your lender offers 70% LTV, then you’ll need to make a down payment of 30% of your home’s market value.
3. Influences loan approval
Before approving a loan with a high LTV ratio, lenders are likely to check the borrower’s credit score, income stability, and existing financial liabilities. Applying for a lower LTV ratio loan generally demands less paperwork which may result in faster approval and quicker disbursal of the loan amount.
How does the LTV ratio affect home loans?
When you get a higher LTV for a home loan, you need to make less down payment. It also means that the EMI will increase as the loan amount is larger. Besides this, here are all ways LTV ratio affects your home loan:
- Loan amount: A higher LTV ratio will give you a higher loan amount. Contrarily, a lower LTV ratio will make it easier for your loan to get approved and get favorable loan terms.
- Interest Rates: Higher home loan amount often leads to higher interest rate, which directly affects your EMI and increases your total monthly repayments.
- Repayment Terms: The LTV ratio directly impacts the home loan repayment as the loan terms change with it.
Example of LTV in home loans
Let’s assume:
- Property value: ₹2 crore
- Loan amount requested: ₹1.2 crore
- LTV = (1.2 crore ÷ 2 crore) × 100 = 60%
Since a 60% LTV ratio is within the permitted limits and also poses lower risk to the lender, you'll get better interest rates. But if your loan amount is greater than ₹1.5 crores (75% LTV of the entire house value), then the lender can increase the interest rate and, in most cases, can ask for more income proof.
How to reduce your Loan-to-Value (LTV) Ratio?
A lower Loan-to-Value (LTV) ratio makes your loan application stronger. It also enables you to get lower interest rates as well as better repayment options. Below are some ways in which you can reduce your LTV ratio:
1. Increasing your down payment
A simple method for lowering your LTV ratio on a home loan application is to make a higher down payment, as it reduces the amount of the loan needed. If you can afford to make a down payment of 30-40%, your loan amount will be reduced significantly. A smaller loan amount will mean lower EMIs along with less interest to be paid over time.
2. Opting for a lower loan amount
You can easily manage your monthly EMIs within your budget by opting for a lower loan amount. It reduces your financial burden and default risk in addition to lowering the total amount of interest paid over the loan's term.
3. Increasing house valuation
When lenders carry out property valuations, the value of your property may be set at a higher price if it is situated in a prime location or if it has recently been renovated. A higher house valuation makes the LTV ratio of the property lower and, therefore, will help to lower your interest rates and get flexible repayment options.
Conclusion
If you are considering taking a home loan, it's best to know about how the LTV ratio affects your loan and EMI. Lenders consider and assess LTV as a way of gauging the risk of lending. A higher LTV ratio means a smaller down payment is needed. Still, a larger loan amount causes the EMI to rise. On the other hand, a lower LTV ratio indicates the requirement for a larger down payment.
If you are looking for an affordable and accessible home loan, Jio Credit offers favourable terms and features. You can apply for a loan of up to ₹10 crore and get a repayment tenure of up to 25 years.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial and/or tax advice or an offer to provide a loan. Loan approval terms and eligibility criteria, including the Loan-to-Value (LTV) ratio and type of collateral, are strictly subject to Jio Credit Limited’s policies and regulatory guidelines. You may consult your financial and/or tax advisor for any advice on your requirements.
