So you found the perfect property to call home. Now, you may be looking at various home loan plans to finance your dream house, and probably wanting to secure the largest loan amount possible to reduce your immediate financial burden.
However, it is your loan-to-value ratio (LTV) that determines the amount of property value you can cover using a loan. Here’s what the ratio is all about.
What is the LTV ratio?
Simply put, the LTV ratio is the home loan percentage of property value offered by the lender as the principal amount. This means the higher the ratio, the higher the loan amount you can get.
Typically, a high LTV ratio can get you anywhere between 75-90% of the total property costs. As for the remaining amount, the borrower has to chip from their own pockets as the down payment.
You can also get a 10% higher LTV ratio for a residential property than a commercial one in most cases. Additionally, occupied real estate fetch higher home loan property valuation than rented out or vacant spaces.
How to calculate the LTV ratio?
The LTV is calculated using the following formula –
LTV=Principal Amount/Market Value of the property.
There are calculators available online that can do the math for you in seconds as well. Just enter details such as the property value, and the principal loan amount, and watch the LTV value pop onto the screen.
Now that we know this, the obvious question is how to get a higher LTV ratio?
Getting a higher home loan on property value
From a lender’s perspective, a higher LTV means investing more funds, hence higher risk. Thus, they want to be sure of your repayment ability to grant you the required sum. To do this, they check your monthly income, employment status, debt to income ratio and credit score. Here’s how each of these factors influences repayment capacity –
Additional Read: 5 Factors Affecting Value of Residential Property
• Monthly income
Long-term employment at a reputed company indicates a steady income source. This, in turn, means you’re likely to make timely repayments and hence lesser lending risk.
• Debt to income ratio
The lower your debt liabilities, the lower is your debt-to-income ratio. A lower value indicates you don’t have excessive debts, credits, or financial obligations, which means you’re more likely to repay your loans timely. Since this lowers lending risk, it boosts your LTV ratio as well.
• Credit score
Since a higher credit score reflects better management of finances, having a good credit score (above 750 points) can reduce the lending risk and increase your LTV ratio.
Additional Read: What is a Loan to Value (LTV) Ratio and Its Importance in Determining Your Home Loan Eligibility?
You can cover roughly 75 to 90% of property costs through a high LTV ratio. Still, you’ll need to finance a significant portion of the property cost yourself. So, make sure to arrange funds for the down payment simultaneously. If you’re on the market for a housing loan, Tata Capital can help you out. Get the most competitive interest rates and flexible repayment options with Tata Capital. With our home loan EMI calculator, start planning your loan plan today.