Demystifying Loan-to-Value (LTV) Ratio for a Loan Against Property

If you are planning to avail yourself of a loan against property or a property loan, you have to take into consideration a few important aspects, such as the loan against property interest rate you are being offered and how this interest rate will affect your repayment capacity, the loan tenor your lender is willing to offer you and whether you will be able to repay your loan within the designated period without feeling too financially stressed. While you are thinking about these important figures and numbers, there is another important number that you must think about — LTV ratio. The LTV ratio is important as it not only decides whether or not you will be approved for a loan against property but also the terms and conditions that you will get on your loan. So, read on to know everything there is to know about the loan-to-value ratio or LTV.

What is the Loan-to-Value Ratio?

The loan-to-value ratio refers to the percentage of a property’s current market value that can be sanctioned as a loan. Calculating the LTV ratio is easy: simply divide the loan amount you want to avail of or the loan amount you are being offered by the current market value of your property and multiply the number you get by 100.

Here is the formula for calculating the LTV ratio: 

LTV Ratio = (Loan Value or Loan Principal/Current Market Value of the Property) x 100 

Looking at the formula, it is quite easy to understand that calculating the LTV ratio is not a difficult task and anyone can calculate the LTV ratio. Now that we know how is the loan-to-value ratio calculated, let us look at why lenders look at the loan against the property loan-to-value ratio.

Why is the Loan-to-Value Ratio Important?

 When an individual applies for a loan, lenders decide the loan amount to be sanctioned as well as the terms and conditions of the loan based on their repayment capacity as well as the risk involved in lending money to them. If the risk involved is higher, lenders may charge a high loan against the property interest rate and sanction a lower loan amount. However, if the risk involved for the lender is low, the lender may agree to sanction a high loan amount, and that too at a low rate of interest. 

In the case of loans against property, borrowers can typically avail of up to 75% of a property’s market value as a loan. However, they may choose to keep the LTV ratio lower to avail of better loan terms. 

Let us illustrate this with an example. Let us assume Mr A wants to avail of a loan against a property the current market value of which is Rs.50 Lakh. Mr A is a salaried individual who needs money urgently to cover some housing expenses. He needs Rs 12 Lakh to cover the expenses. In this particular case, while Mr A can borrow up to Rs.37.5 Lakh, he should borrow only Rs.12 Lakh. Why? If Mr A borrows Rs.35 Lakh against his property, his LTV ratio would be 75%. However, if he borrows only Rs.12 Lakh, his LTV ratio would be 24%. For lenders, the risk is much higher in the case of high LTV ratio loans. Therefore, high LTV ratio loans also lead to high interest rates on loans. Mr. A should borrow only Rs.12 Lakh against his property that costs Rs.50 Lakh as by keeping their LTV ratio low, Mr. A will not only be able to avail himself of a property loan at low loan against property interest rates, but he will also be able to repay his loan easily.

If you are planning to apply for a property loan but do not know how to calculate the LTV ratio, you can use the LTV calculator. Read on to know more about this beneficial tool.

What is a Loan-to-Value Ratio Calculator?

A loan-to-value ratio calculator is an online tool that borrowers can use to calculate the loan amount they are eligible for based on the current market value of the property and the type of property they are planning to pledge as collateral. Other than helping you calculate the loan amount you are eligible for; the calculator also gives the users their EMIs for the loan amount, their total interest outgo as well as the loan repayment schedule to help them with loan repayment. 

Different loan-to-value ratio calculators ask for different snippets of information. However, in most cases, this is what an LTV calculator asks for:

1. To start with, the calculator will ask your employment type.
2. Then, you will be required to enter the value of the property that you plan to pledge as collateral and select whether the property is residential or commercial.
3. After this, enter the loan tenor that you wish to go for. 
4. Lastly, select the rate of interest your chosen or preferred lender charges on loans against property. 

Once you enter this information, the calculator will give you the loan amount you qualify for and your EMIs for this amount. It will also show you the total interest that you will have to pay your lender through the tenor of the loan.

If you wish to increase your chances of loan approval, apply for this loan amount or something lower. Doing so will not only enhance your chances of loan approval but also give you higher negotiating power and the ability to ask for a lower interest rate or better repayment tenor.

Lastly, if you are planning to avail yourself of a loan against property or a property loan, know that the LTV ratio is very important. You may prefer to use an LTV calculator to calculate the loan amount you qualify for before beginning the application process. Doing so would help you enhance loan approval chances as well as win better negotiating power and avail of the property loan on terms and conditions that benefit you.