Understanding Loan-to-Value (LTV) Calculations: Key Metrics for Mortgage Seekers

How is LTV calculated? 
The generally used formula for calculating the LTV of a given property is the Principal Amount / Market Value of the property.  

The importance of LTVs: why do they matter so much? 
We cannot help but underscore how important LTVs are, and here are all the right reasons for us to do so. Each time a loan is extended, it is done with the intent that the lender generates income atop the same. However, in situations where a loan 

LTV for a loan helps one in arriving at the maximum account of financing that can be based on the property that is being pledged. 

How does the LTV vary on the building use of the property? 

Yes, building use is a crucial determiner in LTV calculations. The property is appraised on whether it is commercial, residential or industrial, and other building uses used by the government. The determiner does not stop at building use; it further goes on to incorporate building occupancy as a critical determiner, too. A vacant property is likely to get a lower loan value than an occupied property. Similarly, rented properties may also get lower loan values than occupied properties. This can apply to both commercial and residential building uses. In fact, in specific scenarios, industrial properties may also get a higher LTV. 

What are the factors that are taken into consideration for determining the LTV Ratio?

Age
Lenders also look into the age of the loan applicant.

Credit Score
It goes without saying that the credit score is imperative for all financial transactions; it is a direct indication of your economic history and credibility. In general, a score of 750 or 800 is recommended for getting good LVR ratios and lower interest rates. 

Current Financial Obligations
This is an important parameter to understand the existing outstanding debts or regular EMI payments made by an applicant. 

Income
Lenders also look into the applicant’s annual income from all sources. 

Work experience
The number of years a loan applicant has worked is also taken into consideration. The greater the work experience, the more the chances of fetching a more enormous loan amount with a longer tenure, too. 

What is an ideal LTV Ratio?
The LTV ratio varies from borrower to borrower. We will look at the same, specifically in the case of home loans. 

Home loan interest rates are imperative for borrowing loans with the correct LTV ratio. With high-interest rates, it is best to borrow less and make a significant down payment. For a loan availed to make hefty down payments, opting for a lower LTV is, hence, key. Provided the loan benefited (borrower) has the funds to create a more significant down payment, they should take the lower LTV ratio route. 

• This will help them save money on interest.
• It will reduce the equated monthly instalment amount. 
• It will lessen the tenure of the loan. 

If a borrower has limited funds and wants to avail of a big loan, they must opt for a high LTV ratio. 

One should go through the prepayment terms and conditions with the financial institution they are applying for a home loan. 

What are the pros and cons of a high LTV Ratio?
A high LTV Ratio comes with its pros and cons. It is suitable for some borrowers and extremely undesirable of a situation for others. 

Looking at the pros, a high LTV ratio provides the perks of a more considerable loan amount. It calls for the borrower to spend less money, and their down payment reduces a lot. Simultaneously, the EMI also increases owing to the more enormous loan amount. 

A lower LTV Ratio calls for a significant down payment. This keeps the EMI low. It is advisable to use an online calculator tool to navigate through this effectively. 

How do you calculate LTV using a calculator tool available online? 

First things first, to calculate LTV, you must enter the desired loan amount (principal amount) and market value of the property (property value) in the fields of the calculator. For example, if the principal amount, that is, the loan amount, is ₹10 crore, and the property value is worth ₹25 crore, then you must enter these values into the fields. 
Next, click on ‘Calculate’ to know the maximum LTV ratio. This comes out to be a percentage which, in this case, comes to 40%. 

Bottomline

LTV calculations of a given property are generally done with the simple formula, Principal Amount / Market Value of the property. It is essential to know about the LTV ratio if you are planning to avail of a loan, particularly in the case of home loans. It is strongly advisable to read through all the prepayment terms and conditions of the financial institution you are applying for a loan. A high LTV ratio provides the perks of a more enormous loan amount; on the other hand, a lower LTV Ratio calls for a significant down payment. Using calculator tools can help you navigate through these seamlessly.