What is Loan-To-Value Ratio in Home Loan and How to Calculate It

Buying a residential property is often a culmination of your lifelong aspirations. It is also one of the most significant financial decisions of your life, one that will impact you for years to come. Most of us look for a home loan or financing options to buy the home of our dreams. So, it becomes imperative that we understand the terms of the loan product we apply for. The LTV or Loan-To-Value Ratio is one such aspect that we should understand because it impacts the amount of downpayment we need and our loan eligibility as well.

What is LTV?

When you opt for a home loan to buy, renovate, or expand your property, the bank or NBFC will extend this loan using the property as collateral. This makes it a secured loan. However, the bank or lender will not provide you with the complete value of the property as a loan.
The loan you will be eligible for will be a portion of the property's market value. This is done to reduce the lender's risk and incentivise the lending process. The Loan To Value (LTV) Ratio is this percentage or portion of the property value that can be lent to the homeowner or borrower.

How is LTV calculated?

When you plan to buy a property, you are expected to fund a part of the property value through your savings. This is often referred to as the downpayment. You will likely approach a trusted bank, home finance institution, or NBFC for a loan to cover the remaining amount. The LTV Ratio of your loan is calculated using the following formula –
LTV Ratio (in percentage) = Amount borrowed ÷ Value of property x 100
Let us understand this better with the help of an example –
If you are looking to buy an apartment in Mumbai which costs INR 90 lakhs, and the bank can extend an LTV of 70%, the loan amount you can apply for and expect to receive is INR 63 lakhs. You can use this formula to know the appropriate loan amount and the downpayment you need before applying for a home loan.

RBI Guidelines

The Reserve Bank of India (RBI) is the central bank of India, and the RBI's guidelines regulate home loans offered by banks. This means that banks can only provide loans in accordance with the LTV ratio prescribed by the RBI. This means banks cannot exceed the LTV ratio set by the RBI. So, what do the RBI guidelines mandate? Let's take a look.

Reserve Bank of India (RBI) guidelines mandate that if the bank loan value is INR 30 lakhs or less, the LTV ratio of the loan can be up to 90% of the property value. If the loan amount applied for is between INR 30 lakh and 75 lakhs, the LTV ratio can go as high as 80% of the property value. When a loan seeker applies for a loan over INR 75 lakhs, the LTV ratio of the loan can go as high as 75% of the property value.

Why is LTV Important?

The LTV ratio is an important tool used by banks, housing finance companies and NBFCs to determine the risk involved in approving a loan. A low LTV ratio means that the home buyer is willing to shoulder a greater amount towards the property value from his/her pocket. This implies shared responsibility. With a rise in the LTV, the risk of default by the borrower also increases. Therefore, as a loan applicant, the chances of approval rise if your LTV ratio is low.

Apart from this, an awareness of the maximum prescribed LTV ratio of the bank should give you a clear idea of the amount of money you need to put up towards a downpayment. This will make financial planning easier.

Qualifying for a Home Loan

The Loan To Value Ratio applies to all secure loans but is considered very important in the case of home loans or home financing. The bank or lender will calculate your eligibility depending on the LTV ratio. However, it is essential to remember that the LTV ratio is only one of several factors the bank or NBFC may consider when deciding on your home loan application. Other factors for approval include steady income sources, proper documentation, and a good credit score. Most reputed banks are quite transparent about the eligibility criteria and application process.

Another critical factor that will help you gain loan approval is finding a property with clean documentation and undisputed title deeds. Again, buying property from a trusted developer can help you settle this aspect. Blox brings you RERA-verified properties from developers with an excellent track record for delivering high-quality residential projects on time.