Here’s Everything You Need to Know About the LTV Ratio

Usually, financial jargons are difficult to understand, and if you are a newbie to the world of loans and EMIs, then some terms could be too complex for your comprehension. One such term is LTV ratio or loan to value ratio—one of the most used phrases in the finance sector. Whether it be a two-wheeler loan, used car loan, gold loan, home loan, or loan against property, financial institutions use this term as a measure to determine the loan value.

Curious to know more? Let us dive deep into the article to learn more about the loan to value ratio, including how it is calculated and other details.

What is the LTV ratio?

As the name implies, it means the loan value concerning the property's worth. In secured financing, it is used to determine the maximum amount based on pledged asset's market worth and liquidity. By performing loan to value calculation, borrowers can determine the amount of loan they are qualified for on the asset they are willing to mortgage. Financial institutions, on the other hand, utilise this ratio to assess the risk of granting a loan to a specific borrower who owns an asset. In a secured loan , borrowers cannot acquire a loan amount more than the LTV percentage. Furthermore, the higher the LTV ratio, the greater the chance of default.

How to calculate the loan to value ratio?

Are you wondering how to calculate LTV? To help you, here’s the mathematical formula to calculate loan to value ratio.

Formula,
LTV Ratio = (Borrowed Amount ÷ Value of Property) × 100

You may also use an online LTV ratio calculator to perform loan to value calculations. So, if you apply for a bike loan and the bike is valued at Rs 90,000, and the loan to value ratio is 90 per cent, you will be eligible for a maximum loan of Rs 81,000. However, keep in mind that the loan value is dependent on other factors as well. Moreover, the loan to value ratio varies from one lending institution to another.

Also Read: Differences Between Land Loans And Home Loans

How does the LTV ratio work?

Your loan amount and eligibility is influenced by several factors such as the property's worth, applicant's income, age, and employment status, among others. The loan to value ratio is used by the lending institution to set a limit on the maximum loan amount that can be approved in relation to the security's value. You are not permitted to borrow cash in excess of the predetermined LTV percentage.

RBI Guidelines on LTV Ratio

The Reserve Bank of India (RBI) has issued guidelines that allow house loan LTV ratio of up to 90 per cent of the property value for loan amounts of Rs 3,000,000 or less. To understand RBI guidelines on loan to value ratio, let's look at the table below: 

The table implies that if you apply for a home loan and get an LTV ratio of 90%, you will be responsible for the remaining 10% of the property's worth. The LTV ratio is used to figure out how much of a down payment you will need when buying a house or property.

Also Read: Home Loan vs Loan Against Property: What should you choose

Which is Better: A Higher or Lower LTV?

From the perspective of financial institutions: 

Under lower LTV, the borrowers are putting more of their funds, ensuring a stronger sense of involvement and commitment. If the lender approves a greater LTV ratio, the interest rate charged is likewise higher due to the risk inherent in lending,

When assessing property, financial institutions bear in mind that older property that has lost its value due to depreciation may pose a problem for them to resell in the event of non-payment of EMI or loan default. Considering such circumstances, they may refuse the loan request entirely.

From the perspective of borrowers: 

The borrowers always benefit from a higher loan-to-value ratio. One can easily achieve the predetermined goal with a greater LTV ratio. The borrower can also negotiate a longer repayment term and lower interest rate because of the higher LTV.

Also Read: How to Choose the Best Bike Loan in India

To Conclude 

Borrowing without knowing the loan to value meaning may lead to unfavourable consequences in the long run. An LTV ratio compares the loan amount you are willing to obtain against the appraised worth of the asset you want to buy. The loan to value ratio will be lower if your profile is riskier and the asset to be mortgaged is old.