A loan is availed of by individuals when they are in immediate need of funds. To obtain a loan is more straightforward when the borrower is an owner of assets or property. They can use the assets as collateral security with the lender. The amount granted as the loan is not the entire value of the property but a percentage of its value.
This is determined based on factors, including the property type, the age of the property, monthly income, financial obligations, and parameters such as the organizational policy at the time of loan against property application. The percentage or ratio of the amount of loan that would be forwarded against the value of the property is today popular as the Loan to Value or LTV ratio.
LTV Ratio as a Criterion for Eligibility
Having a lower LTV ratio is beneficial for both lenders and borrowers. The lenders are more interested in low-risk borrowers as they need to lend out a relatively lower amount. It also works for borrowers as they can achieve quick disbursal and approval and negotiate with lenders regarding different terms like improved interest rates, longer repayment tenors, and so on.
How to Lower LTV Ratio
A borrower can try one of these steps to knock down the LTV ratio and boost home equity:
- Getting a present can help make a more significant down payment. If an employer, family member, or friend contributes a gift in the form of money that a borrower can use toward the down payment, it can help lower the LTV ratio.
- Make extra principal payments. The LTV ratio falls with every mortgage payment. If a borrower makes even a single extra payment annually, they will be able to reduce the LTV ratio quicker.
- Opt for a short-term loan. If a borrower can afford a higher monthly outgo, a 15-year fixed loan will lower the LTV ratio faster than a 30-year one.
- Buy a relatively lesser expensive house. Opting for a home at the lower end of the down payment budget can help avoid a loan with a high LTV ratio.
How to Calculate the LTV Ratio
Calculating the LTV ratio is simple: The rule is to divide the amount an individual is borrowing by the value or price of their property.
Purchase LTV Ratio
The LTV ratio for a house purchase is estimated by dividing the loan amount by the property’s sale price. For instance, if an aspiring homebuyer is buying a house worth Rs.200,000 and making a down payment of 3%, they are borrowing Rs.194,000. That means the LTV ratio is 97% (this is because 194,000 divided by 200,000 = 0.97).
Refinance LTV Ratio
To calculate the LTV ratio for a refinance, divide the loan balance by the value of the home. If the loan balance is Rs.240,000 and home is worth Rs.300,000, the LTV ratio is 80% (240,000/300,000 = 0.80). Alternatively, borrowers can use an LTV calculator to estimate the LTV ratio. Similarly, they can also use a loan against property EMI calculator to estimate the EMI outgo with the given loan amount, tenor, and other details.
Top Three Frequently Asked Questions on LTV Ratio
Here are some of the most frequently asked questions on the LTV ratio and the answers to those.
#1 Does the LTV ratio affect the interest rate?
Typically, the higher the LTV ratio is, the higher will be the interest rate. This holds for a conventional mortgage if a borrower needs PMI and has a low credit score. Yet another drawback is that a borrower will pay an inflated PMI premium for a higher LTV ratio if they have a lower credit score and history.
#2 What is a decent LTV ratio?
If a borrower is availing of a conventional loan against property, an LTV ratio of about 80% or slightly lesser is desired. Conventional mortgages with an LTV ratio exceeding 80% require private mortgage insurance or what is popularly known as PMI. It can add thousands of rupees to payments over the mortgage loan tenor.
#3 Does LTV affect loan against property refinance rate?
The LTV ratio typically affects loans against property interest rates. When it comes to loans against property refinancing, the rule of thumb is that a borrower must have at least 20% equity in their property.
Even though an LTV ratio is an essential factor in influencing the loan against property approval, there are other key factors too. Some of these are credit scores or the debt-to-income ratio. The factors are tallied by the lending institution to verify if borrowers are capable of comfortably repaying the loan.