The Buyt Desk
Home loan customers come across various criteria that are set by lenders. It includes a minimum down payment that needs to be raised by a client, annual income essential for home loan eligibility, good credit score, and others. One of the most important home loan criteria is the maximum LTV (loan-to-value) ratio of a lender. Don’t know what this term means? Keep reading this post to know the basics of the LTV ratio.
What Do You Mean By The Loan to Value Ratio?
This is the part of the property value that a lender can finance via a loan. Financial institutions such as non-banking finance companies, banks, and housing finance companies use this ratio to evaluate the risk of giving a home loan to a borrower.
Loan to value ratio for a lender is used to determine that they don’t give a higher amount than the property’s actual price. For a lender, if this ratio rises the supposed risk of borrower default increases.
How Is Loan to Value Ratio Calculated?
Financial institutions calculate a borrower’s LTV using this method.
(Amount borrowed / Property value) x 100 = LTV ratio in percentage
For example, you are purchasing a home of Rs.1 crore and the LTV ratio of your bank is 70%. In this case, your bank can give the maximum loan of Rs.70 lakh.
RBI Regulations for LTV Ratio
RBI or Reserve Bank of India guidelines are fixed for financial institutions. According to these guidelines, the LTV ratio for home loans of up to Rs.30 lakh can go up to 90% of the property value. Here, 90% LTV means that a loan borrower needs to pay a minimum of 10% of the property value from his own pocket. The rest amount can be financed via loans.
LTV ratio can reach up to 80% for loans ranging from Rs.30-75 lakh. However, for loans more than Rs.75 lakh, the LTV ratio will be 75%. Thus, to determine the minimum down payment, consider the LTV ratio.
The limit for home loan eligibility is set to 75-90% by lenders under RBI guidelines. This limit allows a lender to protect itself from the potential downturn or correction in property prices and in a situation when the borrower can’t afford to repay the EMI (equated monthly installment) on the loan in the coming time.
Lower LTV Ratio Is Good for Borrower
A lower LTV ratio is considered better for a borrower. The lower this ratio, the better the interest rates and other terms on a home loan. A borrower can determine the LTV ratio from a lender while applying for a home loan. A borrower with a lower LTV ratio should negotiate with a lender for reduced interest rates and higher loan tenure when needed.
For example, a home loan with a 60% LTV ratio would be given with a lower interest rate by a lender. It may need a negotiation if the financial institution doesn’t provide a lower interest rate on a loan. The reason is that the more of your own money is used in the down payment for making a home purchase, the reduced risk for a lender.
