LTV Ratio for Home Loan: What is It and How to Calculate

Over the past few years, the real estate industry in India has experienced significant growth, positioning it to become an essential economic driver. Most people who buy homes in India do so with the assistance of some form of mortgage financing, otherwise known as a home loan. 

However, the approval of a home loan is contingent on several factors, and the LTV (Loan-to-Value) Ratio is one of the most important factors. Therefore, the Ratio of the loan amount to the value of the purchased property is referred to as the LTV Ratio. 

Lenders utilise this Ratio to determine the borrower's creditworthiness and the level of risk associated with providing financing to the borrower. This blog aims to give readers a comprehensive understanding of the LTV Ratio for home loans in India and its significance in obtaining a loan.

What is LTV Ratio?

When calculating the maximum loan amount a borrower can receive for the property acquisition, the LTV (Loan-to-Value) Ratio is essential. It is a percentage of the property's overall value that the lender is willing to finance.

Lenders evaluate the level of risk associated with providing financing to a borrower by calculating the LTV Ratio. A higher LTV Ratio indicates a riskier loan, which results in a higher interest rate for the loan. Therefore, the borrower's creditworthiness is the primary factor in determining the maximum loan amount, ranging from up to 80 per cent of the property's value.

In addition, the loan tenure and the requirement for mortgage insurance are both impacted by the LTV ratio. If the LTV Ratio is higher than 80%, the borrower may be required to obtain mortgage insurance to reduce the risk of lending to them.

It is essential to have a solid understanding of the LTV Ratio when applying for a home loan because this Ratio affects the total amount of the loan, the interest rate, and other factors that can affect the borrower's financial decisions.

How is LTV Ratio Calculated for Home Loans in India?

Lenders in India use different methods to calculate the LTV Ratio for home loans, depending on various factors like the property's age, location, and type.

The most common method used by lenders in India to calculate the LTV Ratio is the lower cost or market value (LCMV) method. According to this method, the lender takes the lower property's cost or market value as the basis for the loan amount.

The following steps are followed to calculate the LTV Ratio using the LCMV method.

1. Determine the Cost and Market Value of the Property

The lender evaluates the cost and market value of the property to arrive at the lower of the two values. The cost of the property is the total amount spent on constructing or buying the property, while the market value is the current market price.

2. Determine the Maximum Loan Amount

The lender determines the maximum loan amount based on the property's lower cost or market value. For instance, if the cost of the property is INR 1 crore, and the market value is INR 1.2 crore, the maximum loan amount would be based on the cost of the property.

3. Calculate the LTV Ratio

Once the maximum loan amount is determined, the lender calculates the LTV Ratio by dividing the loan amount by the lower cost or market value of the property and multiplying the resulting figure by 100. For example, if the maximum loan amount is INR 80 lakhs, and the cost of the property is INR 90 lakhs, the LTV Ratio would be 88.88% (80 lakhs/90 lakhs * 100).

Sometimes, lenders may use the HCMV (Higher Cost or Market Value) method to calculate the LTV Ratio for home loans. According to this method, the lender takes the higher property's cost or market value as the basis for the loan amount. However, this method is less common than the LCMV method.

Here's an example: 

Suppose the property is valued at INR 1 crore, and the borrower seeks a loan of INR 80 lakhs. If the cost of the property is INR 90 lakhs, the LTV Ratio would be calculated based on the cost of the property, which is INR 80 lakhs/ INR 90 lakhs * 100 = 88.88%.

However, if the property's market value is INR 1.2 crores, the LTV Ratio would be calculated based on the market value, which is INR 80 lakhs/ INR 1.2 crores * 100 = 66.67%.

Significance of LTV Ratio in the Home Loan Process in India

The LTV Ratio is a crucial factor in the home loan process in India, and its significance can be summarised as follows.

• Determines Maximum Loan Amount: The LTV Ratio determines a borrower's maximum loan amount for a property purchase. A higher LTV Ratio means a higher loan amount and vice versa.

• Affects Interest Rate: The LTV Ratio affects the interest rate the lender offers. A higher LTV Ratio means a higher interest rate as the loan is considered riskier.

• Influences Loan Tenure: The LTV Ratio influences the loan tenure the lender offers. A lower LTV Ratio means a longer loan tenure offered as the loan is considered less risky.

• Determines Need for Mortgage Insurance: If the LTV Ratio is higher than 80%, the lender may require the borrower to take mortgage insurance to mitigate the risk involved in lending to them.

• Affects Loan Processing Time: The LTV Ratio can also affect the loan processing time. A higher LTV Ratio may require additional documentation and verification, which can delay the loan approval process.

• Impacts Down Payment: The LTV Ratio also impacts the down payment required by the borrower. A lower LTV Ratio means a lower down payment required by the borrower.

• Indicates Property Valuation: The LTV Ratio can indicate the valuation of the property. A lower LTV Ratio may mean the property is overvalued, and a higher LTV Ratio may mean the property is undervalued.

Factors Affecting LTV Ratio for Home Loans in India

Several factors can affect the LTV Ratio for home loans in India. For example, a young couple, Rohan and Malini, had their hearts set on purchasing their first home in India. 

However, as they started the home loan process, they realised that the Loan-to-Value Ratio would be a significant factor in determining their loan amount and whether they could afford their dream home. Here are some key factors that could affect the LTV Ratio for their home loan.

1. Property Type: Rohan and Malini learned that the type of property they were interested in could affect the LTV Ratio. For example, lenders may offer a lower LTV Ratio for commercial properties or those in high-risk areas.

2. Credit Score: The couple understood that their credit score could be crucial in determining their LTV Ratio. A higher credit score could result in a higher LTV Ratio, while a lower score could lead to a lower LTV Ratio.

3. Income: Rohan and Malini knew their income would also impact their LTV Ratio. Lenders may offer a higher LTV Ratio to borrowers with a higher income as they may be considered less risky.

4. Down Payment: The couple understood that their down payment could also affect their LTV Ratio. A higher down payment would lead to a lower LTV Ratio, while a lower down payment could result in a higher LTV Ratio.

5. Valuation of the Property: Rohan and Malini were aware that the valuation of the property they were interested in could also affect their LTV Ratio. An undervalued property could lead to a higher LTV Ratio, while an overvalued property could result in a lower LTV Ratio.

6. Mortgage Insurance: If their LTV Ratio was higher than 80%, Rohan and Malini knew they might need to take mortgage insurance, which would add to the cost of their loan and increase their monthly EMI.

Considering these factors, they could make informed decisions and increase their chances of securing the home loan they needed to buy their dream home.

Benefits of a Lower LTV Ratio for Home Loans in India

While a higher LTV Ratio can lead to a higher loan amount, a lower LTV Ratio can provide several benefits for borrowers. Here are some benefits of a lower LTV Ratio for home loans in India.

• Lower Interest Rate: A lower LTV Ratio can result in a lower interest rate for the borrower. Since the loan is less risky, lenders may offer a lower interest rate, leading to significant savings over the loan tenure.

• Longer Loan Tenure: A lower LTV Ratio can also result in longer loan tenure. Lenders may offer a longer loan tenure with a lower LTV Ratio as the loan is considered less risky. Longer loan tenure can result in lower EMIs, making it easier for the borrower to repay the loan.

• Lower Down Payment: A lower LTV Ratio can also result in a lower down payment for the borrower. Since the lender is financing a lower percentage of the property's value, the borrower may not need to make a high down payment, which can reduce the upfront cost of purchasing a home.

• Lower Risk of Default: A lower LTV Ratio can also reduce the borrower's default risk. Since the borrower is financing a larger percentage of the property's value, they are likely to have more equity in the property, making it less likely for them to default on the loan.

• Greater Negotiating Power: A lower LTV Ratio can give the borrower greater negotiating power. With a lower LTV Ratio, the borrower can negotiate better terms and conditions for their home loan, leading to significant savings over the loan tenure.

LTV Ratio Limits for Different Types of Home Loans

Different types of home loans in India have different LTV Ratio limits, and understanding these limits is crucial for borrowers seeking a home loan. So let's take a closer look at the LTV Ratio limits for different types of home loans in India.

1. Loan for Purchase of a New House: The LTV Ratio limit for a home loan for purchasing a new house is typically up to 80% of the property's value. This means the borrower must make a down payment of at least 20% of the property's value. 

But why is this limit set at 80%? Well, lenders consider a 20% down payment as an indication of the borrower's financial stability, and it reduces the risk of default on a loan.

2. Loan for Purchase of a Resale Property: The LTV Ratio limit for a home loan for a resale property is typically up to 70% of the property's value. This is because resale properties may have wear and tear, and lenders consider them riskier than new properties.

3. Loan for Construction of a House: The LTV Ratio limit for a home loan for constructing a house is typically up to 75% of the property's value. This is because the lender bears the risk of the construction process, which may take time for the property to appreciate.

4. Loan for Renovation of a House: The LTV Ratio limit for a home loan for renovating a house is typically up to 70% of the property's value. Renovation loans are riskier than home loans as there is no guarantee that the renovation will increase the property's value.

5. Loan Against Property: The LTV Ratio limit for a loan against property is typically up to 60% of the property's value. This is because the lender can seize the property if the borrower defaults.

 Strategies to Improve Your LTV Ratio

Improving your LTV Ratio can help you secure a higher loan amount and buy your dream home. Here are some strategies to improve your LTV Ratio.

• Increase Your Down Payment: One of the most effective ways to improve your LTV Ratio is to increase your down payment. The higher the down payment, the lower the LTV Ratio, which can result in a higher loan amount. So, save up as much as possible for the down payment.

• Improve Your Credit Score: A higher credit score can also help improve your LTV Ratio. Lenders consider a higher credit score as an indication of financial stability, and it can result in a higher LTV Ratio. So, pay your bills on time, avoid taking too much credit, and maintain a healthy credit utilisation ratio.

• Consider a Co-borrower: Adding a co-borrower with a stable income and good credit score can help improve your LTV Ratio. This is because the lender considers the co-borrowers income and credit score when calculating the LTV Ratio.

• Choose a Lower-priced Property: Choosing a lower-priced property can also help improve your LTV Ratio. This is because the loan amount will be lower, and the down payment will be lower, resulting in a lower LTV Ratio.

• Negotiate the Property Valuation: Finally, negotiating the property valuation can also help improve your LTV Ratio. If you believe the property is undervalued, you can ask the lender to re-evaluate it. A higher property valuation can result in a lower LTV Ratio and a higher loan amount.

The LTV Ratio is a critical factor in the home loan process in India. It represents the percentage of the property's value that the lender is willing to finance and determines the maximum loan amount a borrower can get for a property purchase. The LTV Ratio for a home loan also affects the interest rate, loan tenure, and loan processing time. 

Borrowers can increase their loan eligibility, get lower interest rates, and enjoy several other benefits by maintaining a lower LTV Ratio. Understanding the LTV Ratio and its significance can help borrowers make informed decisions and navigate the home loan process more effectively.

A real estate website called NoBroker assists people in buying, selling, and renting homes. NoBroker can help with a home loan's LTV ratio in several ways, including property search, appraisal, and loan comparison.

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