What is Loan-To-Value (LTV) Ratio: How to Calculate & RBI Guideline

When you apply for a secured loan, the value of the collateral you provide determines the loan amount you can get, which is referred to as the loan-to-value (LTV) ratio. Simply put, it is the ratio of the value of the asset you put up as collateral and the amount you receive as a loan. 

Knowing about the lender’s LTV ratio lets you decide whether you can get the funds you require as this ratio varies from lender to lender. Read on to learn more about how to define loan-to-value ratio, its importance and more. 

What is LTV?

This term is applicable when you apply for a secured loan, which requires you to provide collateral, including a loan against property, a gold loan, etc. It helps you calculate the maximum amount you can receive as a loan based on the total value of the asset you put up as collateral.

Example of LTV Ratio

While you can find out the maximum LTV that your lender offers, your actual LTV depends on your creditworthiness. To explain the loan-to-value ratio better, here is an example: 

• Lenders typically don’t finance 100% of the asset value
• Say your lender offers you an LTV of 80% 
• If the value of your asset is ₹1 crore, then you can get up to ₹80 lakhs as a loan
• The greater the loan-to-value ratio, the higher the amount you can get as a loan

How to Calculate LTV Ratio

Computing your loan amount is easy. To begin with, you will need the valuation of your asset. Here is the loan-to-value ratio formula:

• After knowing the market value, use the following formula: 

LTV Ratio = (Principal loan amount / Market Value of the asset) * 100

• If your loan amount is ₹7.5 lakhs for an asset worth ₹10 lakhs, then your LTV ratio is 75%

Advantages and Disadvantages of Loan-to-Value Ratio

It is a crucial metric in the lending industry that determines the size of a loan available to you. Check out some of its pros and cons below:

Advantages	Disadvantages
For borrowers, it ensures easier access to credit	A higher LTV ratio can generally mean that you will have to pay higher interest rates
For lenders, it provides better credit risk assessment and reduces the risk of default	For lenders, it generally translates to higher administrative costs

Why is the Loan-To-Value Ratio Important? 

The lender’s final loan-to-value (LTV) ratio impacts your loan amount and your loan terms. Here is why this ratio becomes crucial when you apply for a loan:

• With a higher LTV, you may have to pay a lesser down payment 
• However, a high ratio spells out an increased risk for the lender, and you may be charged a higher interest rate
• A lower ratio may mean that you need to pay a substantial down payment, but it can result in a lower interest rate, allowing you to repay the loan with affordable EMIs
• By understanding the meaning of the LTV ratio and how it will affect your borrowing and repayment experience, you can choose the lender that offers the best deal
• Lenders have different LTV ratios based on the asset type
• If your asset is more liquid, you may get a higher ratio and vice versa

Tips to Choose Between High and Low LTV Ratios

Now that you know what the LTV ratio is, here are a few tips to help you understand whether to go for a high or low ratio to best suit your pocket: 

• A high ratio is usually ideal when you do not have the resources to make a substantial down payment
• It also works out when you need a high-value loan and can manage to repay a bigger amount as EMI each month
• You can opt for a lower LTV ratio if you can make a sizeable down payment and want to repay comfortably and without much strain 
• You can choose one based on your EMI budget and tenure 
• A higher loan amount with a shorter tenure can result in a high EMI and vice versa

RBI Guidelines on LTV Ratio

The Reserve Bank of India (RBI) plays a pivotal role in regulating the Indian financial system. One of the key tools used by the RBI to manage credit risk and systemic stability is the Loan-to-Value (LTV) ratio. Check some of the crucial guidelines below:

• As per the circular released by the RBI on April 01, 2022, the LTV ratio for housing loans can go up to 90% for properties valued up to ₹30 lakhs
• For properties with values ranging from ₹30 lakhs to ₹75 lakhs, the lender cannot offer more than 80% as financing
• If the market value of your property is above ₹75 lakhs, then you can get a maximum of 75% of your property value as your principal amount
• To calculate these values, the RBI factors in the default risk associated with the loan amount
• In another circular, the RBI stated that the LTV range for gold loans would be 75% – 90%

Keeping these facts in mind, you can get the ideal funding. However, if you need a collateral-free loan, you can rely on the Fibe’s Personal Loan. You can get funding of up to ₹5 lakhs affordably and without any hassles. Download the Fibe Personal Loan App or register yourself on our website to apply online in seconds! 

FAQs on LTV Ratio

What is a good loan-to-value (LTV) ratio?

The ideal LTV ratio depends on the type of asset you are pledging and the funds that you need. A loan-to-value ratio of 80% is generally considered good for a home loan.

What does 60% LTV mean?

This means that you can get 60% of your asset’s value as the loan amount. So, if your asset value is ₹5 lakhs, then you can get a loan of ₹3 lakhs at 60% LTV.