Decoded: Loan-to-Value Ratio and Its Impact on Home Loan

Buying a home is a major financial decision by people in India. Given the high property prices, a majority of homebuyers take home loans to finance their dream house.

A prospective homebuyer often has to take into consideration several factors including budget, property price, home loan interest rate, tenure, repayment etc. However, they often get confused as to what is the amount of loan they will get when they apply for a home loan? There are many factors that decide what would be your home loan disbursement amount based on your income, eligibility, credit score and existing debts.

One critical factor that plays a pivotal role in determining the feasibility of obtaining a home loan is the Loan-to-Value (LTV) ratio. Let us delve into what the LTV ratio is and how it impacts home loan borrowing.

LTV Ratio for Loans

The recently released report– ‘Happy Homebuyers’ by Bankbazaar.com explains that that LTV is a critical financial metric used in home loans to assess the risk associated with a mortgage. It represents the ratio of the amount of money borrowed through a mortgage (the loan) to the purchase price of the home.

The report further highlights its application in case of home loans. For example, if you take a loan for Rs. 40 lakh for a house valued at Rs. 50 lakh, your LTV ratio is 80%. LTV is governed by RBI’s rules. For low-value properties under Rs 30 lakh, you can borrow up to 90%. But for high-value properties above Rs 75 lakh, you can borrow no more than 75%. This guidance shapes your financial planning since you are required by regulation to pay part of your home purchase out of pocket.

Also Read: RBI keeps repo rate unchanged at 6.5% – What it means for homebuyers?

A lower LTV, often achieved through a larger down payment, can lead to favourable interest rates and loan terms, while a higher LTV may lead to higher interest rates, mortgage insurance requirements, or even loan denials.

Impact on Borrowing

Down Payment Requirement: The LTV ratio directly affects the down payment amount required when purchasing a home. It is common for lenders to finance up to 80% to 90% of the property’s value. If the LTV ratio is higher, it means you can secure a home loan with a lower down payment, making homeownership more accessible.

Property Selection: The LTV ratio can influence your choice of property. If you have a limited budget for a down payment, you may need to focus on properties that are within the financing range permitted by the lender. This can sometimes limit your options, especially in areas with high property prices.

Interest Rates: The LTV ratio can also impact the interest rates offered on your home loan. If you are borrowing a higher percentage of the property’s value, lenders may perceive the loan as riskier, potentially resulting in a slightly higher interest rate. Conversely, a lower LTV ratio may help you secure a lower interest rate.

Loan Eligibility: LTV ratios can vary between lenders and loan products. Some lenders may be more conservative and offer lower LTV ratios, while others may provide more flexibility. Your eligibility for a home loan depends on your income, credit score, and the lender’s policies regarding LTV ratios.

Loan Tenure: The LTV ratio can also influence the maximum loan tenure available to you. If you opt for a higher LTV ratio, lenders may offer shorter loan tenures to mitigate risk. Conversely, a lower LTV ratio may allow you to choose a longer loan tenure, which can lower your monthly EMI payments.

To sum up, the LTV ratio is a crucial factor in the home loan borrowing process. It determines the amount of financing you can obtain, impacting your down payment, interest rates, and property choices. As a potential homebuyer, it’s essential to understand the LTV ratio and its implications, as it can significantly affect your ability to purchase your dream home and the overall cost of homeownership. Compare LTV ratios offered by different lenders and choose the one that aligns with your financial goals and repayment plan.

(The author is CEO, Bankbazaar.com. Views are personal)