How is Loan to Value beneficial for you?

Possessing any asset, be it a house or a car; gives a great sense of joy and accomplishment. When used smartly and responsibly, a loan is a great route to purchase an asset of your choice. Rather than paying a lump sum and locking your finances, repaying a loan via EMIs can help you utilize your money elsewhere. However, before applying for a loan, it is advisable to understand the working and calculation of the loan. One such important aspect is the LTV Ratio. Put simply, it is a ratio of the loan amount to the value of the asset. LTV ratio ensures that the lender doesn’t finance more than the asset value. A low LTV is considered good for both the lender and the borrower.

What is a Loan to Value Ratio?

The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. A high LTV for lenders means that they are lending a bigger loan amount proportionate to the value of the asset. For borrowers, a high LTV could mean that they have made a lower down payment. Thus, the associated risk increases for the lender, and such high LTV ratio loans come with a higher interest rate. A low LTV means that the borrower has made a large down payment and hence he/she is borrowing less from the lender. In such cases, the associated risk decreases for the lender and he/she can get better terms, including interest rates, on the mortgage.

To sum up, a high LTV is not considered good and vice versa.

How is LTV Ratio Calculated?

The LTV ratio is calculated by lenders using the below-given formula:

LTV Ratio (%) = Amount Borrowed/Property Value X 100

For example, if you wish to buy a house worth Rs.10 lacs and the LTV ratio of your bank is 70%, then the maximum amount of loan that you can avail of is Rs.7 lacs.

What does a Loan to Value Ratio Mean to Borrowers?

High LTV Loan

As mentioned earlier, a high LTV ratio means higher risk for the lender and increased cost for the borrower. A high LTV loan could mean some or all of the following:

• You have paid a low down payment.
• Your monthly loan repayment is higher.
• Your income proofs are not proportionate to the loan amount you are applying for.
• You have to pay higher mortgage insurance premiums if any.

Low LTV Loan

A low LTV loan means that you are more invested in your asset. A low LTV loan could mean some or all of the following:

• You have paid a higher amount as a down payment.
• Your monthly loan repayment is lower.
• Your income proofs are sufficient for the loan amount you are applying for.
• You can enjoy discounts on your mortgage insurance premiums if any.

How Can You Lower Your LTV?

A low LTV ratio means better benefits. Here are some of the ways you can lower your LTV and enjoy better terms and benefits:

• Make a bigger down payment: If you have surplus cash, you could make a large down payment.
• Make Extra Loan Repayments: If you are servicing 12 EMIs, you could consider making a couple of extra EMI payments. Your LTV ratio drops with every mortgage payment.
• Select a Short Tenure Loan: If you are comfortable with a higher monthly EMI, a short-term loan will lower your LTV faster than a longer-duration loan.
• Buy a less Expensive Asset: If possible, consider buying a less expensive house or vehicle as this can help you avoid a high-LTV ratio loan.

Suggested Read: WHAT IS HOME LOAN LTV?