What is Loan to Value (LTV) Ratio?

The Loan-to-Value (LTV) ratio is a financial metric used by lenders to assess the risk of lending to a borrower for a secured loan, such as a home loan or a loan against property. It represents the percentage of a property's appraised value that is being borrowed. In simple terms, it compares the size of the loan you're requesting to the value of the property you're using as collateral. A higher LTV ratio indicates a higher risk for the lender, as the borrower has less equity (their own stake) in the property.

How is LTV Calculated?

The formula for calculating the LTV ratio is straightforward.

LTV (%) = (Loan Amount / Appraised Property Value) × 100

For example, if you want to buy a home valued at ₹50,00,000 and you are requesting a loan of ₹40,00,000:

LTV = (₹40,00,000 / ₹50,00,000) × 100 = 80%

This means your down payment (your equity) is 20% of the property's value.

Why LTV is Crucial for Lenders

LTV is a primary tool for risk assessment. A lower LTV is always preferred by lenders for several reasons:

• Higher Borrower Equity: A low LTV means the borrower has made a larger down payment and has more of their own money invested in the property. This "skin in the game" makes them less likely to default on the loan.
• Protection Against Property Value Decline: If the property market declines, a lower LTV provides a larger buffer for the lender. If the borrower defaults, the lender can sell the property to recover the loan amount. A lower LTV increases the likelihood that the sale price will be sufficient to cover the outstanding loan balance.
• Indicator of Financial Health: A borrower's ability to make a substantial down payment is often seen as an indicator of their financial discipline and stability.

RBI Guidelines on LTV for Home Loans in India

The Reserve Bank of India (RBI) has set specific limits on the LTV ratio for home loans provided by banks to ensure financial stability and protect both lenders and borrowers. These guidelines are tiered based on the loan amount:

• For home loans up to ₹30 lakh, the maximum LTV ratio is 90%. This means the borrower must make a down payment of at least 10%.
• For home loans above ₹30 lakh and up to ₹75 lakh, the maximum LTV ratio is 80%. The required down payment is at least 20%.
• For home loans above ₹75 lakh, the maximum LTV ratio is 75%. The required down payment is at least 25%.

It's important to note that these are the maximum permissible limits. A bank may choose to offer a lower LTV based on its internal risk assessment of the borrower's profile.

How Your LTV Ratio Affects You

• Loan Approval: A very high LTV ratio might lead to your loan application being rejected, as the lender may deem it too risky.
• Interest Rate: Many lenders offer better (lower) interest rates to borrowers with a lower LTV ratio. A lower risk for the bank often translates into a better deal for you.
• Loan Amount: The LTV limit directly determines the maximum loan amount you can get. If you want to buy a ₹1 crore property, you must be prepared to pay at least ₹25 lakh as a down payment, as the maximum loan you can get is ₹75 lakh (75% LTV).

How to Improve Your LTV Ratio

The most direct way to improve (i.e., lower) your LTV ratio is to increase your down payment. Saving for a larger down payment before applying for a home loan can significantly improve your loan terms and increase your chances of approval. While it requires more upfront capital, it can save you a substantial amount in interest payments over the life of the loan.

Frequently Asked Questions (FAQs)

1. What is "Appraised Property Value"?

This is the value of the property as determined by a professional valuer appointed by the lender. It may not always be the same as the price you agreed to pay the seller. The lender will always use the lower of the appraised value or the sale price to calculate the LTV.

2. Does a lower LTV guarantee loan approval?

No. While a low LTV is very favorable, lenders also consider many other factors, such as your credit score (CIBIL), income, employment stability, and existing debts, before approving a loan.

3. Can I get a loan with a 90% LTV?

As per RBI guidelines, a 90% LTV is only possible for home loans up to ₹30 lakh. For higher loan amounts, the maximum LTV is lower.