Understanding LTV and its Impact on Your Home Loan
Home loan borrowers come across several criteria given by lenders such as credit score, Form 16, property documents, etc. Another parameter known as Loan to Value is an important ratio used in mortgage lending by financial institutions, banks, housing companies, and non-banking finance companies to assess the risk in lending.
LTV is the amount of loan given to the borrower against the appraised value of the property. The ultimate objective of calculating LTV is to ensure that the lender does not lend a higher amount of loan than the actual price of the property. Generally, higher LTV loans are considered higher risk loans. For example, if you are applying for a loan of ₹1 crore and the bank’s LTV is calculated as 70%, the maximum loan which can be sanctioned is ₹70 lakh.
How is LTV Calculated?
Most lenders offer home loans at the lowest possible interest rates when LTV is at 80% or below. To determine the LTV ratio, you have to divide the loan amount by the value of the asset multiplying by 100 to get a percentage.
LTV = Mortgage amount / Value of the asset
Reserve Bank of India (RBI) guidelines regarding Loan to Value (LTV)
As per the RBI guidelines, LTV is fixed for financial institutions. For home loans up to ₹30 lakh or less, LTV can go up to 90%. A 90% LTV means that the borrower has to pay a 10% down payment from his pocket. The rest of the amount is lent by financial institutions or banks. For loans from ₹30 lakh to ₹75 lakh, LTV can be given up to 80% of the property value, whereas for loans above ₹75 lakh, the given LTV is 75%. The given guidelines can help the borrowers to determine the minimum amount of down payment to buy a home. The lenders can limit their LTV range between 75% and 90%. With these limits, lenders protect themselves from uncertainties, loan defaults, correction in market prices, and other market risks.
What Factors Determine Home Loan Eligibility and What’s a Good LTV
- Income- Higher income increases the credibility of the borrower. The lender is willing to give a loan to a borrower who has substantial regular income. The higher the income, the higher is the loan amount that can be given to a borrower. As LTV assesses the risk in lending, higher-income assures low risk in lending. If the borrower’s income is high, the lender is willing to give a higher LTV.
- Age of the borrower– Home loan eligibility is directly connected to the age of the borrower. The cut-off age as mandated by banks is 60 years. You have a bigger advantage to avail loan at an early age, as you have a maximum number of years to repay the loan. If you apply for a home loan at an early age, banks would be willing to offer you a higher LTV.
- Credit history– The credit history of a borrower represents his/her credit behaviour. There is minimum risk in lending to borrowers with a good credit score. To determine your credit history, the CIBIL score is calculated. It is a score calculated by the Credit Information Bureau (India) Limited and ranges between 300 and 900. A score of 700 and above is considered a good score for eligibility for a loan. A good score represents the borrower’s credibility and banks would be willing to offer a home at a higher LTV.
- Total dues– To be eligible for a home loan, disposable income is very critical. A borrower may have a higher income, but if he has a lower disposable income, he/she may not be eligible for a home loan. To determine the real income, the total debts of a borrower is calculated. Total debts against the current income determine the home loan eligibility of a borrower. If you are already under huge debt, the amount of loan sanctioned would be lower.
With a lower LTV, banks are exposed to minimum risks; however, it means the borrower may end up paying a higher down payment on their home. Thus, a higher LTV is better for a borrower as they need not pay much from their pocket for down payment.
You can get to know about your LTV from the lender. If you are getting a loan at a lower LTV, you can negotiate for lower interest rates or higher tenure with the lender.