What is LTV Ratio and How is it Calculated?

Every individual who has thought about applying for a home loan is familiar with the concept of the LTV ratio. The term may sound intimidating. However, it is a basic financial metric that calculates the final loan amount a candidate is eligible to request.

The LTV ratio also plays a fundamental role in assuring lenders that a borrower is creditworthy. This post dissects the fundamentals of the LTV ratio to streamline your financial decision-making process.

Let us now define loan-to-value ratio! LTV or Loan-to-Value ratio is a percentage which indicates the debt-bearing potential of a borrower. It also helps to determine the final loan amount which an individual is likely to receive upon loan application approval. Let us understand the basics of LTV ratio with the help of an example:

Consider you wish to purchase an apartment amounting to 5 lakh. Your bank will first review your application and calculate the LTV ratio. Based on this calculation, the bank approves 4 lakh as the initial loan amount. Other documents will also be verified, and the final loan amount will be revealed after approval.

The LTV ratio follows a very basic formula:

LTV = (Loan Amount/Property Value) × 100

Therefore, if you wish to purchase a house priced at 6 lakh and plan to borrow 4.5 lakh, here’s how it plays out:

LTV = (4,50,000/6,00,000) × 100 = 75%

This 75% alerts the bank, “This person is covering 25% of the property’s cost from their own pocket.”

The loan-to-value ratio is a key metric which financial institutions and independent lenders heavily rely on to make the final loan approval decision. A high LTV ratio indicates that the lender is potentially facing higher risk, as the majority of the required purchase amount is being released by them. A lower LTV informs them that you’re making a healthy down payment, which makes them more comfortable.

For you, as a borrower, the LTV can also affect your home loan journey. If your LTV loan ratio is low, you may be offered better interest rates, higher approval chances, and possibly fewer conditions to meet.

It’s a bit like showing a lender that you’re financially responsible and ready to share the weight of the purchase.

Yes, there are limits to how high your LTV can go. The Reserve Bank of India has set specific rules for this:

• For loans up to 30 lakh, the LTV can go up to 90%

• For loans between 30 lakh and 75 lakh, the maximum LTV is 80%

• For loans above 75 lakh, it’s capped at 75%

The standards implemented together protect lenders and borrowers. It assists borrowers in regulating their loan requirements by ensuring the correct loan amount is requested.

One of the easiest ways to reduce your LTV loan-to-value ratio is to increase your down payment. Even putting in a little extra from your savings can make a big difference. A lower loan amount not only improves your LTV but may also get you better loan terms.

Another smart move is to choose a property with strong market value. If the valuation comes in high, your LTV ratio automatically drops, even if your loan amount stays the same. So yes, with a bit of planning, you can improve your LTV and strengthen your application.

When you define the loan-to-value ratio, you’re essentially talking about how much of the property value is being financed through a loan. It’s a number that carries weight, i.e. for the lender, it signals risk; for you, it shapes the terms of your home loan.

And the best part? It’s totally within your control. By saving a little more, picking the right property, and understanding what lenders are looking for, you can put yourself in a great position to get the home loan that works best for you.

So, the next time someone mentions LTV, you won’t need to nod in confusion. You’ll know exactly what it means and how it affects your loan. The LTV meaning isn’t just a number on a form, it’s a smart way to measure how much skin you’ve got in the game when buying a home. And now that you understand how it works, you’re already one step ahead in your home-buying journey.