LTV Ratio: Why It’s Important When You Apply for a Loan

When planning to purchase a home with a loan, it is essential that you understand all the related terms and conditions. One of the most important among them is the Loan-To-Value ratio (LTV ratio). This will help you to determine how much of the property cost you have to cover from your own funds.

The home loan LTV ratio indicates the percentage of the property’s value that your bank or financial institution can finance as a loan. Lenders usually don’t finance 100% of the property’s value. The outstanding amount is what you have to contribute as a down payment.

Here are some of the key points that will help you to understand home loan LTV ratio clearly:

• A higher LTV means you are getting a larger loan amount, which increases the lender’s risk

• Financial institutions check the LTV ratio to ensure compliance with guidelines and avoid over-lending

• A lower ratio may help you secure lower interest rates and better repayment terms

• LTV acts as a shield in case the property value depreciates during the loan’s tenure

You can calculate the loan-to-value ratio with the help of a simple formula:

LTV Ratio Formula = (Loan Amount/Appraised Value of the Property) × 100

For example:Say a property’s appraised market value is ₹85 lakh, and the bank agrees to offer a loan of ₹68 lakh. The LTV ratio would be:

• LTV Ratio = (₹68,00,000/ ₹85,00,000) X 100 = 80%

It is important to note that the appraised value used for LTV calculation may not always match the actual market price. Lenders often make adjustments based on internal assessments, which may result in a lower final LTV ratio than initially expected.

The Reserve Bank of India (RBI) has an outline of specific limits for LTV ratios that depend on the size of the home loan:

• Up to 90% LTV: For home loans of ₹20 lakh or less

• Up to 80% LTV: For home loans above ₹20 lakh and up to ₹75 lakh

• Up to 75% LTV: For home loans exceeding ₹75 lakh

These guidelines are in effect since June 21, 2013, and aim to reduce risk for lenders and promote responsible borrowing. The remaining amount is what you as a homebuyer will need to pay out of pocket.  

The loan-to-value ratio impacts the loan approval process and interest rates. Here’s how:

• Loan Approval

Lenders use the LTV ratio to assess risk. A lower ratio shows that you will contribute more funds, and this indicates financial stability. A higher ratio, on the other hand, makes lenders safeguard risk by examining your ability to repay on time. 

• Interest Rates

Lenders often offer lower interest rates when the LTV ratio is low, as it reflects lower risk. A higher LTV usually results in higher interest rates. This is because your dependency on the borrowed funds is higher. 

A favourable loan-to-value ratio leads to a sizable loan amount and lower interest rates, and increases chances of approval. Use the following strategies to negotiate with the lender and decrease the LTV ratio:

• Strengthen Your Financial Profile
  • Build a Strong Credit Score: A high score will increase your credibility and may help you secure a higher LTV
  • Maintain Stable Income: Consistent income and employment indicate that you are financially reliable

• Increase Your Down Payment

A larger deposit will reduce the LTV ratio. It also lowers the lender’s risk. So, increasing your deposit from 10% to 20% can lead to better rates and terms.

• Compare Lenders

Reach out to multiple lenders to evaluate interest rates, fees, and LTV ratios. This will give you leverage and clarity before making a decision.

• Negotiate the Purchase Price

Securing a lower sale price directly reduces your LTV ratio and boosts your chances of loan approval with favourable terms.

• Understand Lender Criteria

Familiarise yourself with how lenders assess property value and apply LTV limits. This awareness will allow you to negotiate smartly and within their parameters.

The approval of your loan and the LTV ratio depend on your asset value. This applies even if your income qualifies you for a higher loan amount. The financial company will always cap the maximum loan amount based on the prescribed LTV limits. Keep in mind that a lower LTV ratio can help you secure better loan terms. 

1. What is a good LTV ratio?

A good ratio is 80% or lower. Aim to pay over 20% as a down payment on your home to secure better loan terms.

2. What is the best LTV for a gold loan?

The LTV ratio for gold loans represents the loan amount as a percentage of the pledged gold’s value. As per RBI guidelines, lenders can offer up to 75% of the current gold value.

3. How to calculate LTV manually?

To manually calculate it, use the following formula:

LTV Ratio = (Loan Amount/Appraised Value of the Property) × 100

4. What is a maximum LTV ratio?

It depends on the type of loan but generally ranges from 75% to 90%. The Reserve Bank of India (RBI) sets the LTV ratio to 90% for home loans of up to ₹25 lakhs or less.

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