What is loan-to-value (LTV) ratio in a home loan?

The loan-to-value (LTV) ratio is a crucial concept that helps banks when evaluating home loan applications

Most adults dream of owning a house. Real estate is a brilliant investment, offering great returns and unparalleled security. But buying a house without financial aid is almost impossible in the current market. Prices of residential properties are higher than ever, making it extremely difficult for people to supplement their real estate portfolio.

A home loan is a useful tool to address this problem. With a home loan, you can immediately purchase the property and then pay the bank in EMIs.

But before you apply for a home loan, understand everything there is about the product. While most features of a home loan are easy to understand, the loan-to-value (LTV) ratio is a challenging concept. In this article, we will discuss the meaning of LTV.

What is the loan-to-value ratio?

Lenders employ the loan-to-value (LTV) ratio to estimate the liability they incur with a secured loan. LTV in banking calculates the difference between the amount borrowed and the market value of the collateral, such as a house or automobile. For instance, if a lender grants a loan half the asset's value, the LTV is 50%. As the LTV ratio grows, so does the prospective loss to the lender if the borrower defaults on the loan.

What is the loan-to-value ratio in terms of a home loan?

The LTV ratio refers to the percentage of a property's worth that a lender may finance with a home loan. Financial institutions, such as banks, housing finance firms, and non-banking finance companies (NBFCs), utilise the LTV to measure their risk in granting you a home loan. The goal of employing the combined loan-to-value ratio for a lender is to ensure that they do not lend more than the property's true value. If a lender's LTV rises, the danger of a borrower default rises as well.

How is the loan-to-value ratio calculated?

The LTV ratio formula is:

LTV (in percentage) = (Amount borrowed / Value of property) x 100

For example, if you are purchasing a home worth ₹1 crore and your bank's LTV ratio is 70%, the bank's maximum loan amount is ₹70 lakh.

The RBI’s guidelines regarding the LTV ratio

According to RBI norms, the LTV ratio for home loans of less than ₹30 lakh can be 90% of the property value. A 90% LTV implies borrowers must pay at least 10% of the property's worth out of their pocket, with the rest financed through loans. LTV ratios between ₹30 lakhs and ₹75 lakh can reach 80%, while LTV ratios over ₹75 lakh must be at least 75%. If you want to figure out what your minimum down payment will be, it is imperative that you take the LTV ratio into consideration.

The loan-to-value ratio is a crucial component of home loans. Every lender, including Metra Trust, uses it when reviewing home loan applications. Metra Trust, meanwhile, also employs digital processes to quickly process and approve home loan application. The bank also offers the best home loan interest rates in the market, which saves money. Apply for a home loan with Metra Trust and become a proud homeowner today.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Metra Trust or its affiliates to any licensing or registration requirements. Metra Trust shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.