Loan to Value Ratio: A Guide to Smarter Loan Planning

Sometimes it's difficult to plan your money well. There are many things to think about, and you might not remember all of them when you make plans or decisions. This is especially true when you need money for something specific, like buying a house or a car or for your business.

One common way to get money is by taking a loan. But even applying for a loan requires planning. You have to decide how much money you need, how much you can pay back each month, which lender to choose, and if you need to provide something valuable as security.

To help you plan better when getting a secured loan, you can use something called the loan to value (LTV) ratio. It's a tool that makes your planning easier.

What is The Loan to Value Ratio?

LTV ratio reveals the loan amount you can borrow

The loan to value ratio or 'LTV ratio' denotes the amount you can be granted for a secured loan based on the value of the asset you would pledge as collateral. This ratio is always expressed in percentage and it is used by banks and financial institutions to decide the loan amount to be granted.

As a borrower or loan applicant, calculating the LTV ratio while planning for your loan will help you get a fair idea of the amount you are likely to be granted by the lender. This way you can make preparations for the remainder of the needed amount and also plan a good repayment structure.

How to calculate LTV ratio?

The LTV ratio is calculated using a simple formula. You will need certain basic financial details to substitute in the formula. The LTV ratio formula is as follows:

Amount of secured loan / Market value of asset * 100

So, if you are applying for a home loan, you will divide the amount you hope to get as a loan with the price of the property you are looking to buy.

For example, if you consider the value of a property to be Rs.20 lakh and you are applying for a loan of Rs.15 lakh, your mortgage LTV ratio would be:

15,00,000 / 20,00,000 * 100 = 75%

Your LTV ratio in this instance would amount to 75%.

In case you don't want to manually calculate the LTV ratio, there are several online loan to value ratio calculators that you can use to calculate the same.

What is a good loan to value ratio?

The value of LTV ratio differs from institution to institution. As a standard, most institutions consider anywhere below 80% to be a good ratio. Now, this doesn't mean that an application for a higher LTV ratio will be rejected by the lender. If you apply for a loan with an LTV ratio higher than 80%, chances are high that the lending institution will charge you a higher rate of interest.

When calculating for yourself, just remember that the lower the LTV ratio, the better it is. When it comes to mortgage LTV ratio, RBI has set some clear guidelines about how much loan a lending institution can approve based on the LTV ratio:

This means that, apart from the amount granted by the lender, the remainder has to be arranged by you personally. It is also, however, important to note that apart from the LTV ratio of a mortgage loan, the lender also considers factors like your credit standing, the property of choice, your age, etc. before deciding on the loan amount and mortgage interest rates.

Takeaway

LTV ratio or loan to value ratio is the percentage value used by lending institutions to finalise the loan amount and interest rates. It is calculated by dividing the loan amount by the value of the asset being pledged as collateral and helps you plan for the repayment EMIs. In the instance of a home loan, a good mortgage LTV ratio is thought to be under 80% and the remainder of the amount needed to pay for the home has to be arranged by you.

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FAQs:

1. 1. What is LTV?

LTV or loan to value ratio is the proportion of the amount borrowed in a secured loan to the value of the asset you pledge as collateral. So, if you are going for IIFL Home Loans Shakthi Loan Against Property, LTV ratio would be the amount of loan divided by the current value of the property you will borrow the loan against.

2. 2. What does LTV mean in a mortgage?

In relation to mortgage, LTV ratio means the amount of the value of your property of choice that the loan will finance. For example, if your mortgage loan to value ratio is 75%, it means that the loan will give you an amount which is 75% of the price of your property of choice. The remaining 25% will have to be arranged by you.

3. 3. How is LTV ratio calculated?

LTV ratio is calculated using a simple formula. The LTV ratio formula is:

Amount of secured loan / Market value of asset * 100

If you find it difficult to compute your LTV yourself using this formula, there are several LTV calculators available online that can help you easily figure out your mortgage LTV ratio.

4. 4. Is a high loan to value ratio good?

When it comes to taking a loan, lending institutions generally prefer that you have a lower LTV ratio. The lower the better. However, this doesn't mean that a high LTV loan won't be approved. If you have good credit standing and good historical relations with your lender, the lender may likely approve the high LTV ratio at a higher rate of interest.

5. 5. What is a good LTV ratio?

An LTV ratio of 80% or lower than that is generally considered good by most lending institutions. But an important point to note is that the LTV is not the only factor lenders consider while approving a loan. Aspects like your age, payback capability, existing debt, your credit score, etc. also play a major role.