The loan-to-value ratio, which is the LTV full form, is among the crucial factors determining the loan amount you can get. Based on your eligibility and other factors, lenders decide your loan terms, among which is your loan-to-value ratio.
In simple terms, the LTV ratio refers to the maximum amount lenders can offer against the value of your asset. Knowing your lender’s maximum loan-to-value (LTV) ratio and the LTV that works best for you will help you make a better decision and get the required funds affordably.
Here is more on what is loan-to-value ratio, its importance, how to calculate it and tips for choosing the ideal LTV.
A loan-to-value (LTV) ratio is the maximum percentage of your asset’s value that a financial company can offer you as a loan. It only comes into play when you are taking a secured loan, which requires you to pledge an asset as collateral. This could be a home, car, investments or more.
To understand this better, consider this example: 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.
As you can see, lenders typically do not finance 100% of the asset value. So, the LTV decides what you can get as your loan amount. While you can find out the maximum LTV that your lender offers, your actual LTV depends on your creditworthiness.
As per the circular released by the Reserve Bank of India 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.
Furthermore, 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%. Keep in mind that in case you want to pledge your jewellery to get financing.
Computing your loan amount is easy, and to begin with, you will need the valuation of your asset. Once you know the market value, use the following formula: LTV Ratio: (Principal loan amount / Market Value of the asset) * 100.
Considering this, if your loan amount is ₹7.5 lakhs for an asset worth ₹10 lakhs, then your LTV ratio is 75%.
The lender’s final loan-to-value (LTV) ratio impacts your loan amount and your loan terms as a result too. 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. Thus, you may be charged a higher interest rate.
On the other hand, a lower ratio may mean that you need to pay a substantial down payment. But it can result in a lower interest rate. Thus, you can repay easier with EMIs of affordable amounts.
As such, 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. Remember, 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.
Also Read: What Is a Debt-To-Income Ratio
Now that you know what is LTV ratio, 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 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.
Keeping these facts in mind, you can get the ideal funding. However, if you need a collateral-free loan, you can rely on Fibe. With our Personal Loan Online, 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 seconds!
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.
The formula is as follows:
LTV ratio: (principal loan amount/asset value) * 100
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.