Whether you are applying for a home loan or a loan against property, you must familiarize yourself with the meaning of loan-to-value ratio. The loan-to-value ratio is important as it helps lenders decide the loan amount that can be sanctioned against a property. So, what is the loan-to-value ratio and how is it calculated?
When a borrower applies for a loan and the lender decides to extend them a loan offer, the first thing that a lender does is assess the market value of the property being pledged as collateral and then decide on the percentage of the property’s total market value that can be extended as a loan. This percentage is what we know as the Loan-to-Value ratio or the LTV ratio. In other words, the LTV ratio is the ratio of the total value of the loan to the total value of the property, expressed in percentage. The LTV ratio is calculated using the following formula:
LTV Ratio = (Principal loan amount/ Value of a property) x 100
Lenders can sanction up to 90% of a property’s value as a loan. However, just because a lender will agree to sanction 90% of a property’s value as loan does not mean you should opt for such a high LTV ratio. When a borrower opts for a high LTV ratio, their stake in the property stays on the lower side and the risk involved for the lender increases. On the other hand, when a borrower opts for a low LTV ratio, the risk involved for the lender decreases since the stake of the borrower increases. Therefore, when borrowers opt for a low LTV ratio loan, lenders offer their best loan terms and conditions.
There are many advantages to keeping your LTV ratio on the lower side. To start with, lenders sanction low LTV ratio loans on more lucrative loan terms. In simpler words, a low LTV ratio can help one avail of a loan at low interest rates. Home loans are big-ticket and loan-term loans. Therefore, even a small reduction in the interest rate can help one save a lot of money in the long run. Further, when borrowers are able to avail of a loan on low interest rates, their EMIs go down and stay on the affordable side. This makes the process of loan repayment simple and stress-free. Lastly, when borrowers opt for a low LTV ratio loan, they have higher negotiating power since the lenders are also quite willing to have them on board as a client. Thus, in this case, borrowers can ask for beneficial terms and conditions, such as zero pre-payment charges or quicker loan processing, etc.
Now that we know the meaning of loan-to-value ratio, let us look at what is the ideal loan-to-value ratio? Well, financial experts suggest that borrowers must try to pay at least 20% of the home’s cost as down payment. Thus, they should try and keep the LTV ratio at least 80%. However, yet again, the borrowers should try their best to pay as higher a down payment amount as possible while also not feeling financially overburdened. If you are not sure about how to calculate the LTV ratio, simply use an online loan-to-value ratio calculator. These calculators are quite accurate and deliver results in an instant. Further, they are also easy to use. So, use them to your best advantage.
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