LTV Ratio and Its Importance on your Loan

With property prices going through the roof, most middle-class people can't invest in real estate without seeking assistance in the form of home loans. Home loans are the cheapest of all loans. However, if you want to avail yourself of the most lucrative home loan deal, you must familiarise yourself with the concept of the LTV ratio.

The LTV ratio or the loan-to-value ratio is an important factor that helps lenders decide the terms and conditions of a loan offer. The LTV ratio is the ratio of the amount borrowed by a lender to the total value of the property, expressed as a percentage. In very simple words, the LTV ratio tells a borrower the maximum loan amount they can avail of to buy a property and what is the down payment amount they will have to arrange by themselves.

Let us understand this with an example. If a homebuyer wants to buy a property worth Rs.1 Crore and they wish to avail of Rs.50 Lakh as a loan, the LTV ratio, in this case, would be 50%. The homebuyer will have to arrange for the remaining 50% of the property value that is to be paid as a down payment on their own. If in this same case, the borrower applies for a loan of Rs.80 Lakh, the LTV ratio would become 80%.

Here’s the formula to calculate the LTV ratio.

LTV Ratio = (Amount owed on the loan/ total value of the property) x 100

If you are not sure how to calculate the LTV ratio, simply use a loan-to-value calculator. You will be able to find this calculator easily online. Simply search for it and you will get several results.

Now, let us understand how the LTV ratio affects a loan and its terms and conditions.

When borrowers avail of a high loan amount and therefore, keep the LTV ratio also high, they decrease their stake in the property and therefore, increase the risk involved for the lender. Thus, when borrowers opt for a high LTV ratio, lenders charge a high rate of interest on loans. This not only makes EMIs expensive but also increases the overall cost of borrowing the loan by increasing the total interest payout.

On the other hand, when borrowers arrange for a higher down payment and avail of a small loan, they increase their stake in the property and reduce the risk involved for the lender in the loan deal. Therefore, in the case of low LTV ratio loans, lenders offer better loan terms and conditions. In such cases, borrowers are offered loans at a lower rate of interest. Further, opting for a low loan-to-value ratio also gives borrowers higher negotiating power. Thus, they can request lenders for a higher loan sanction, longer loan tenor and other beneficial loan terms and conditions, such as zero pre-payment charges.

In conclusion, if you are planning to apply for a home loan, try and keep the down payment high. This will reduce the loan amount, making it easier and simpler for you to repay the loan. Further, this will also reduce the loan-to-value ratio, which in turn, will make you eligible for better loan deals based on beneficial terms and conditions, such as low home loan interest rates, longer repayment tenor, nil prepayment charges, etc.