Various parameters are factored in before purchasing a residential property or home with the assistance of a home loan. LTV, or loan-to-value ratio, is one of the important parameters here. This assists in determining the maximum loan proceeds that will be available to you by financial institutions like IDFC FIRST home loan, Bank of India home loan, Kotak Mahindra bank and other lenders.
LTV for home loans –
LTV or loan to value is an important term used by banks or HFCs to convey the ratio of loan to value of asset bought. This might differ among different financial institutions. This generally is in the range of between 75 per cent and 90 per cent of the property cost. Also, this depends on your relationship as well as your track record with the lender.
LTV (loan to value) ratio – pros and cons –
There are several pros and cons of having a higher and lower LTV (loan to value) ratio. If you are provided with a higher loan to value, in this case, your down payment may be reduced, but your EMI may be higher as your loan proceeds are higher. On the contrary, if you have a lower loan-to-value ratio, it means you must pay a higher down payment, and monthly EMIs, in such a case, will be way lower as the loan proceeds are lower.
What is the ideal LTV ratio?
While applying for a home loan, you are even required to consider how much LTV is expected. Thus, it is crucial to conduct a cost-benefit analysis of your financial standing first, then determine how much loan proceeds you will be placing an application for. Note that the higher the home loan amount you apply for, the lower will be your requirement to pay the down payment and vice versa. Higher loan proceeds would mean a higher tenure, while smaller loan proceeds would mean your repayment tenure is lower.
LTV is a common ratio used by lenders to evaluate your risk linked with any of the loan opportunities. A high LTV infers the loan proceeds you are availing are bigger than the home loan required, and the lenders may stand to lose more in case you default. Lower LTV means you can put down more funds for your home purchase. This is looked upon as a good indicator to factor in your loan repayment choices and the possibilities of your future defaults. To explain this concept in reference to the money value derived, the LTV ratio may be considered as an amount that you can avail of post-dividing the loan proceeds by the overall property value.
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LTV ratio = Amount borrowed / property value X 100
For banks, the ratio is utilized to determine the loan amount that they would disburse. For instance, let us say the home that you plan to purchase is Rs 2 crore and you consider making a down payment of 15 per cent, which is Rs 30 lakh. This means you would require a loan equaling Rs 1.7 crore, which isn’t covered in the down payment. Thus, if 15 per cent is a down payment, then LTV will equal 85 per cent. As loan with higher LTV is looked upon as riskier, banks generally encourage a healthy loan-to-value ratio of up to 75 per cent. Few of the banks may even process the loan on a 90 per cent LTV ratio based on the prevailing economic scenario and your credibility.
The central banking authority, the RBI, generally sets a parameter for maximum LTV for different loan categories. For loans of as high as Rs 30 lakh, the maximum permitted LTV is 90 per cent. For loans of value between Rs 30 and 70 lakhs, the permitted LTV is 80 per cent, and for loans over Rs 75 lakh, it is 75 per cent. Depending on this example, the lender will just lend 75 per cent of the home’s cost, which means you will require to arrange more funds and reduce your LTV or shift to another lender offering a higher LTV.
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So, what’s a good LTV ratio?
The asset that is funded is crucial for determining what constitutes a strong LTV ratio. This means your LTV ratio requirement will be based on the loan that you are sourcing. But when it comes to LTV ratios, it is always suggested to opt for a lower ratio. This can assist you in availing more favourable terms as well as low-interest fees.
While 80 per cent LTV is usually looked upon as good from the lender’s viewpoint, however, to lower your monthly payments or to qualify for a better rate of interest, homeowners might require even more LTV. On the contrary, a higher LTV may be advantageous for you if you are looking to purchase a home faster and get up the property ladder. Thus, in a nutshell, all is based on your home purchasing goals and future repayment capacities. A higher LTV may have stressful and financial implications for a few; however, a lower LTV most probably may put you in a better position financially where you can be stress-free.
To sum it up, all is based on your home purchasing goals and future repayment capacity. A higher LTV may have a stressful financial implication for a few; however, a lower LTV is likely to place you in a great financial position wherein you can save and stay stress-free.
What are the important tips to reduce your LTV ratio?
LTV plays a crucial role when you apply for a home loan because it can assist you in reducing your loan EMIs and saving your money over the total repayment tenure of your loan. Here’s how you can reduce it –
∙ Save up for a higher down payment –
If it turns out that you cannot make any reasonable down payment, you can consider opting for a step back and not rush into purchasing a home. Ensure to wait till you save more as it will assist you in getting lower interest constituent on your home loan. This does not infer that you forgo your dream of purchasing a home. Just give yourself a bit of time to substantially save a bigger down payment amount.
∙ Go for an affordable home –
If you cannot come up with a bigger down payment, it might be time for you to shop around and look for affordable targets. Purchasing a lower-priced home infers you will require borrowing less money, which will lower your LTV.
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