One of the biggest investments people make in their lifetimes is to buy their own house. Considering the volume of investment involved, potential home buyers often opt for a home loan to support their decision.
Housing finance companies often cover a substantial portion of the value at which the property is purchased. The remaining value needs to be funded by the investor as a down payment. The housing loan is then gradually repaid over a period of time in the form of EMIs (Equated Monthly Instalments).
The loan-to-value ratio can be used to assess the portion of the property’s value that can be covered through a housing loan.
What is the loan-to-value ratio?
Loan-to-value ratio or LTV ratio is the amount of money you can borrow against the actual value of your property. The LTV ratio is calculated as a percentage and depends on a number of factors, such as the type of loan to be availed and the relationship between the borrower and lender.
A higher LTV ratio implies a larger loan, and consequently, the amount to be funded by the investor will reduce. In the case of a lower loan-to-value ratio, the amount to be funded by the investor to purchase the property will be higher, but the loan will be lower.
What is a good loan-to-value ratio?
Usually, around 70 to 90 % of the property’s value can be financed as a loan, which is the common LTV Ratio.
The mortgage loan-to-value ratio also varies according to the type of property. Generally, it is higher for residential properties as compared to commercial properties. However, there are some exceptions, as some industrial properties may fetch a high loan-to-value ratio.
Other factors affecting the loan-to-value ratio are age, credit score, financial condition, salary, and work experience of the investor. If the investor has a stable job and has worked for a good amount of time or has a good pay package, then there are chances of getting a higher LTV ratio. Having a credit score above 750 can help in achieving a higher LTV ratio. Investors can easily use an LTV calculator to determine their LTV ratio.
RBI guidelines for the loan-to-value ratio
Now that we know what the loan-to-value ratio is, let us understand the government-mandated guidelines around it. The RBI regulates the housing finance market and has stated that:
- Any property worth 30 lakhs or below can fetch an LTV ratio of 90% for home loans.
- For properties above 30 lakhs to 75 lakhs, the LTV ratio limit is 80%.
- Properties above 75 lakhs should have an LTV ratio of less than 75%.
What does LTV mean in a mortgage?
In the real estate market, when a person buying a property falls short of funds but has an existing property, they could approach the lender and get a mortgage loan against their property. In this case, the property would be the collateral, and the value of the loan will be a percentage of the value of the property. This percentage is also called mortgage LTV. Borrowers can use a loan to value mortgage calculator or simply use the formula mentioned below to compute their LTV ratio.
Loan-to-value ratio formula
While using an LTV calculator, the LTV Ratio is calculated using the following loan-to-value ratio formula:
Loan-to-value ratio = Principal Amount (sanctioned loan amount) / Market value of your property X 100.
For example, if the value of the property is 1 crore and the sanctioned loan amount is 75 lakhs. The LTV ratio would be 75 lakh / 1 crore x 100 = 75%.
Investors can use a loan-to-value ratio calculator or this loan-to-value ratio formula to ascertain the LTV ratio being offered to them by housing finance companies.
Why is the LTV ratio important?
As a borrower, a high loan-to-value mortgage ratio would mean paying a higher EMI. Some lenders recommend taking private mortgage insurance against larger loans. This would result in higher EMIs as well. A lower LTV ratio leaves enough room for budgeting other expenses as long as the investor has the funds to cover the down payment.
An investor’s existing obligations (like other loans) are factored in and compared with their monthly income to determine the best possible LTV Ratio. This helps the lender offer an amount of loan which the borrower will be able to repay.
Lenders prefer home buyers that opt for a lower LTV ratio since it reduces the credit risk on the lender’s part as well. Planning for a lower LTV ratio entails getting a smaller loan and securing enough funds to fund the remaining value of the property.
For example, if an investor wants to purchase a property worth Rs. 80 lakhs with an LTV ratio limited to 60%, the loan amount will be Rs. 48 lakh and the amount of self-funding required will be Rs. 32 lakhs. However, if the investor only has funds amounting to Rs. 30 lakhs and still wants to maintain an LTV ratio of 60%, the value of the property they can invest in will have to be limited to Rs. 75 lakhs.
Therefore, having clarity on the LTV ratio and using an LTV calculator can help investors plan their investments accordingly.
Understanding the loan-to-value ratio can support investors in planning their property investments. Opting for a housing loan that gives you the most optimum loan-to-value ratio is highly recommended to ensure a smooth investing journey.
Tata Capital offers attractive LTV ratios for home loans of all kinds. The housing finance team at Tata Capital ensures that investors get the most competitive rates along with efficient disbursal and flexible repayment plans. Use Tata Capital’s LTV calculator and home loan calculator to plan your property investment today.