Loan to Value (LTV) Ratio: Calculation, benefits & meaning

Taking a Home Loan to fund your dream house is one of the most important steps in your financial journey. Making smart decisions can help you reduce costs, pay off your debt faster, and navigate the process with peace of mind. Knowledge is power, and one of the important aspects to understand is the concept of loan to value ratio associated with Home Loans.

What is a loan to value ratio?

A loan to value (LTV) ratio, in the context of Home Loans, refers to the percentage of the value of the property that the loan provider, such as a bank, can lend to you, the home buyer.

Your bank will review the LTV ratio carefully before arriving at the amount they are willing to loan you to buy your new home. They try to ensure that the amount is not higher than the actual value of the property.

How is the LTV ratio calculated?

Now that you’ve understood what is loan to value ratio, we explain how the LTV ratio is calculated.

LTV Ratio (%) = Principal amount of Home Loan / Value of your property X 100

Say the value of your new home is ₹50 lakhs, and the LTV ratio is 75%, then the principal amount loaned to you is ₹37.5 lakhs.

You can use an LTV ratio calculator to arrive at the precise value, as manual errors can result in errors.

Advantages and Disadvantages of Loan to Value Ratio

Advantages

Knowledge of the LTV ratio in loans can help you plan better. For instance, a rule of thumb is that higher LTV in loans tends to increase the borrower's risk profile. Hence, this calculation makes it easy for banks to arrive at the appropriate principal amount. You can negotiate lower interest rates, EMIs and a higher tenure on your Home Loan with a lower LTV ratio.

Disadvantages

The LTV ratio guidelines dictate that you will need to pay some part of the Home Loan through savings or an alternate funding source. Hence, be sure to have a strategic plan to raise the remaining percentage of funds.

RBI Guidelines on Loan to Value

The Reserve Bank of India (RBI) does not allow lenders to offer 100% of the property value as a Home Loan. According to RBI guidelines, the ceiling for the LTV ratio on your Home Loan is fixed as follows:

• 90% of the value of your property for loan amounts of 30 lakh and below. You will pay 10% or more from your pocket.
• 80% for loan amounts above ₹30 lakh and up to ₹75 lakh. You will pay 20% or more from your pocket.
• 75% for loan amounts above ₹75 lakh. You will pay 25% or more from your pocket.

LTV Ratio and Home Loan eligibility

LTV is important in determining what will be your contribution for purchasing the property. In other words, how much downpayment you will need to make for the property as compared to how much loan the bank will offer you.

Even if you fit into a high-income bracket and have a high credit score, these two factors will not change or influence the maximum LTV ratio. However, these factors can help raise the LTV ratio to the highest allowed percentage as per the valuation of your property.

Also Read: Top 6 factors for selecting the right Home Loan

The takeaway

Now that you have understood what loan to value ratio is, you will be in a better position to choose a home as per your budget and the RBI guidelines. Axis Bank offers competitively priced Home Loans to salaried and self-employed resident Indians and NRIs of up to ₹5 crore with a tenure of up to 30 years.

The interest rate differs for salaried and self-employed professionals, with slightly higher interest charged for the latter. You can choose from a wide range of products based on the valuation of your home and enjoy perks such as waived EMIs and overdraft facilities.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.