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.
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.
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.
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:
Up to Rs 30 lakh
90% of the property value
Between Rs 30 lakh & Rs 75 lakh
80% of the property value
More than Rs 75 lakh
75% of the property value
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.
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.
Here at IIFL Home Loans, we offer you home loans at affordable interest rates and with customisable repayment schedules so you can make your dream of owning a home a reality. Our 100% online application process and quick approval ensure a hassle-free experience. IIFL Home Loans Shakthi Loan Against Property is an initiative aimed at helping you leverage your assets to finance your needs. Learn more about services by paying a quick visit to our website and applying now for a smoother financial experience with IIFL Home Loans.
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.
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.
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.
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.
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.
Disclaimer: The information contained in this post is for general information purposes only. IIFL Home Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment, etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness, or of the results, etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Given the changing nature of laws, rules, and regulations, there may be delays, omissions, or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Home/ Loan Against Property/ Secured Business Loan/ Balance Transfer/ Home Improvement Loan/ NRI Home Loan/ Home Loan for Uniformed Services) loan product specifications and information that may be stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Home/ Loan Against Property/ Secured Business Loan/ Balance Transfer/ Home Improvement Loan/ NRI Home Loan/ Home Loan for Uniformed Services) loan.