ROLE OF LTV RATIO IN A LOAN

Loan Against property,

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In the process of taking or providing a loan, the lenders often set several parameters such as credit score, annual income, etc., for the loan borrower to reduce their risk of getting bankrupt. LTV is also one such criterion defined to determine the maximum value of a loan that can be lent by the financial institution. The Loan To Value ratio (LTV) is a proportion of the property value that the lender can finance through a loan. LTV can be sanctioned by financial institutions against the pledge of properties such as homes, gold ornaments, etc. Visit MyLoanCare and compare different types of loans. Compare home loan, Loan Against property, personal loan , business loan and much more. 

It is calculated by taking the ratio of the borrower’s loan balance to the value of their property. Financial companies such as Banks, NBFCs, housing companies, or any other financial institution set this criterion to calculate their risk in the lending loan. The core purpose of setting this Loan value ratio is that the lender does not lend money higher than the property’s actual price. If the lenders failed to calculate the LTV correctly, they might suffer a huge loss in case of bad loans. If the LTV increases, then the risk of borrower default or bad loan also increases. The formula to calculate LTV is;

Loan to value = (Loan Amount/value of asset )*100

For instance, if a borrower buys a property worth 1crore and the LTV ratio is 75 percent. In this case, the Financial institution will finance 75 lakh, and the remaining 25 lakh the borrower will have to pay on his own.  

In the case of home loans, RBI has defined certain guidelines for the financial institution. The home loan for 30 lakh or less can have 90 percent of LTV, which means the borrower will have to manage only 10 percent of his property value on his own. For the loan of above 30 lakh to 75 lakh, the LTV is set at 8 per cent, and for the home loan above 75 lakh, the LTV is set at 75 per cent. The LTV margin for the lender, as per the guideline of RBI, lies in the range of 75-90 per cent. For gold loans, RBI has permitted banks to have an LTV up to 90 per cent, and for NBFC, the limit is maintained at 75 per cent. So, the lender safeguards itself by being in this margin, and if there is an increase or decrease in the value of the property while the borrower failed to repay the borrowed amount, then the lender can recover the loan by a devaluation of the property. 

Higher and lower LTV 

The higher LTV can be very attractive for both the lender and the borrower as the borrower will get more money to finance its property, and the lender will get higher interest rates. The higher the LTV, the higher will be the interest rate, so the borrower can also negotiate for the long tenure of repayment. But higher LTV can later become a burden on the borrower as he might have to pay more interest. If the borrower failed to repay the amount, the lender would face a huge loss, so it is not very much advisable for the borrower and the lender to opt for a high LTV ratio. 

Lower LTV means lower risk and lowers the interest rate, as well, as the loan would get easily approved. So it is advisable to keep LTV below a fixed range. LTV of 60 per cent or below 60 per cent can prove to be a good choice.

 If a medicine is taken in proper quantity and at the right time, it will prove beneficial for a person’s health, and if taken in excess quantity and at the wrong time, then it can worsen one’s health. The same is with the Loan and the LTV value; if taken in a moderate margin and interest rate, it will prove to be the right step, and if taken excess without worrying about the interest rate, it can prove to be the worst step. 

The loan to value ratio is a proportion of a borrower’s amount from a financial institution to finance his property. Lenders set LTV to calculate their risk in lending loans. There are various margins of LTV set by the RBI for banks, NBFCs, and other financial institutions. The higher the LTV, the higher the risk, so lenders keep the interest rates high for high LTV. Lower LTV means low risk and hence the interest is also moderate. However, It is better to be a little cautious while opting for a high LTV loan as it might seem attractive at a time but can worsen your situation later. 

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