Applying for a Home Loan? Here's all You Need To Know About Loan-To-Value Ratio

Full of its own set of jargons, the banking world often leaves newcomers utterly confused. Home buyers are often puzzled by the various terms financial institutions use while sanctioning loans or deciding the applicant's eligibility. Among the various factors that decide the amount of loan a bank may sanction you is the loan-to-value (LTV) ratio.

What is LTV ratio?

The LTV ratio is a lending risk-assessment tool that financial institutions use to approve loans. Simply put, it is the ratio of the loan amount to the appraised value of the property. Expressed in terms of percentage, the LTV ratio is arrived at by dividing the the loan amount sought by the total value of the property. While your income plays a crucial role in deciding the loan amount you may avail of, the LTV ratio is another decisive factor that influences a bank's decision. The value of the property you plan to buy is determined by the bank's technical agency, based on the property's market value. While most banks want an LTV ratio of up to 80 per cent, some even push the limit to up to 90 per cent under certain circumstances. A home loan with a higher LTV ratio is considered riskier, while the one with a lower ratio is considered less risky.

Consider this example

Gaurav Sinha, a software engineer, wants to buy a home worth Rs 50 lakh. He has a saving of Rs 8 lakh and wants to apply for a loan to fund the remaining Rs 42 lakh. When he approaches the bank, it agrees to lend him only Rs 40 lakh, based on its LTV ratio requirement of 80 per cent. Sinha thought his good credit score and high income might help him get a higher amount, but it did not. Sinha now decides to approach a non-banking financial company (NBFC) and it agrees to issue him a loan amount of Rs 45 lakh, based on its LTV ratio requirement of 90 per cent.

When LTV > 80%

Under certain conditions, banks may offer an LTV of more than 80 per cent. These include:

• Under the Reserve Bank of India diktat, banks can offer LTV of up to 90 per cent for loans below Rs 30 lakh. This is aimed at promoting affordable housing. 

• When a bank is lending to a developer or has a tie-up with a particular developer, it can offer an LTV of up to 90 per cent. 

• Banks may push the LTV limit to 85-90 per cent for their own staff members.