A house is the most coveted possession for all. However, houses are very expensive, and affording one can be really overwhelming. To fulfill your dreams and finance your home comfortably, opting for a home loan can be an ideal thing to do.

A home loan is a service under which a lender gives an advance to the borrower for purchasing a house. In exchange, the house acts as collateral for the lender, in case of non-payment or default of the borrower. One of the key factors that you need to understand concerning home loans is Loan to Value Ratio.

What is the Loan-to-Value Ratio (LTV)?

The LTV full form is Loan to Value Ratio. Loan-to-Value is a risk assessment tool that lenders use to understand the risk they are taking up. LTV helps us understand the amount taken up in exchange for the property provided as a mortgage. Here, the borrowers pledge their assets in exchange for giving the lenders a claim on their assets. LTV allows determining the maximum amount that can be borrowed in exchange for the property provided.

Factors involved in the Loan-to-Value ratio are-

• The loan amount that is offered by the lender
• The actual value of the house

A formula is derived from the same. It allows us to understand the percentage pledged out of the property. Also, keep in mind that banks and NBFCs do not consider the sale value of the property. The LTV derived is based on real worth which is the fair value in the market. The fair value of the property is decided by home loan experts visiting the property. Accordingly, a percentage of the home value will be offered.

LTV = (Loan value/ Value of the house) * 100.

For example, Mr. XYZ wishes to purchase a house for INR 35 lakhs. He approached an NBFC for a housing loan. Since he had a good credit score, his loan was approved shortly after. He will be eligible to receive financial support of Rs. 30 lakhs from the NBFC. For the remaining INR 5 lakhs, Mr. XYZ will need to pay the balance amount from his own savings. This amount is also known as the down payment.

This, the loan to value ration offered by the NBFC

= 30 lakhs/ 35 lakhs * 100

= 85.71% = 86%

bank is-

In this example, the LTV offered is 86% of the value of the property.

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1. Some of the key factors: that are involved in determining the final LTV that may be offered to you are:Your eligibility: Your overall eligibility depends on various factors. One such key factor is your credit score. If you have a good credit profile, the bank or NBFC may offer a higher LTV . A good credit score allows to determine the eligibility of the customer and provides security to the lender. LTV helps decide the maximum amount that can be lent to the borrower. Another important factor is your repayment capacity. If your existing debts form less than 30% of your monthly income, there is a high probability of getting the highest possible LTV.

2. The lender’s policy: Most lenders like SMFG Grihashakti offer upto 90% of the value of the property as a home loan.

RBI Guidelines on LTV ratio:

As providing loans means possessing risk, to ensure the security of the lenders, the Reserve Bank of India has set up LTV guidelines.

• If the loan amount taken up is up to Rs. 30 lakhs, the maximum LTV a lender can offer is 80% or below. In some cases, the lender is allowed to provide an LTV of above 80% but below 90%.
• If the loan amount is above INR 30 lakhs but up to INR 75 lakhs, the maximum LTV that can be provided is 80%.
• If the loan amount is above 75 lakhs then the maximum LTV offered is 75% of the home value.

In all the 3 cases, the balance amount is the down payment that needs to be arranged by the borrower.

Lender’s and Borrower’s perspective:

For a lender, providing a high percentage of LTV is considered to be high risk. In case of default or non-payment, there is a possibility of loss. On the other hand, if the borrower has already put in the maximum share towards the payment from his own funds, the risk reduces for the lenders. It is because the borrower will avoid defaults as they do not want to lose their invested money.

From the borrower’s perspective, taking up higher LTV works for their benefit as they do not have to deal with the financial stress at the moment. Highly LTV allows the borrower to enjoy a longer tenure with lesser interest rates.

Conclusion:

LTV is the key metric in housing loans as it affects the lender as well as the borrower. Having a good credit history and a good repayment capacity allows you to enjoy higher LTV, as the lenders see you as an ensuring borrower who has a high level of commitment. If you are planning to apply for a home loan, you can choose reputed lenders like SMFG Grihashakti for swift processing of your home loan at attractive interest rates.

Must Read: RBI Guidelines for Home Loan.