Grasping key financial terms is important when planning a property purchase. The LTV measure helps banks judge the level of risk in approving a mortgage. Basically it shows how much money you need compared to the worth of the real estate you wish to buy.
Supposedly you want to purchase a house priced at ₹50 lakhs. If you borrow ₹40 lakhs from a bank then the LTV would be 80% (₹40 lakh divided by ₹50 lakh). A higher number means the loan covers a larger share of the asset’s price.
Why is it important to lenders?
Financial institutions use this ratio to evaluate the risk of extending credit. A lower ratio shows more ownership which reduces the likelihood of default. A higher ratio indicates greater reliance on borrowing which increases the risk for the bank.
By analysing this figure, they assess the probability of repayment. This is particularly important if the asset’s value decreases or if financial challenges occur.
How does LTV affect your home loan?
Let’s explore how this ratio can impact your home financing.
- Home loan interest rate
A smaller LTV often brings a cheaper loan since the bank carries less danger. A bigger percentage means more uncertainty which can lead to costlier borrowing terms.
- Down payment
Suppose your LTV stands at 80%; you must cover 20% of the home’s price upfront. Contributing a bigger amount lowers the ratio possibly leading to better borrowing conditions.
- Loan amount
Most banks set a limit on how much they’ll give, so you might not get the full cost covered. In India, this is usually 80–90% which means you’ll need to pay 10–20% at the start.
Factors that influence your LTV ratio
- Property value
If you’re buying a property that’s valued higher, your LTV will automatically be larger, provided you’re borrowing a significant portion of the price.
- Type of property
Whether residential, commercial or under-construction, these can also impact the ratio. Lenders might set different limits based on the property’s category with housing properties often having more lenient LTV ratios than commercial ones.
- Financial profile
Strong credit and steady earnings can help you get a higher LTV. Banks often give better deals to people with proven track records and reliable finances because they seem safer to lend to.
What’s an ideal LTV ratio?
Although the ideal ratio depends on personal situations, many experts suggest maintaining it under 80%. This range is considered optimal and gives a balance between competitive loan conditions and reduced risk for financial institutions.
If your LTV exceeds 80% then it could result in higher interest rates, additional fees or stricter loan conditions. It’s important to maintain this ratio as it can significantly affect the cost and terms of your loan.
How can you lower your LTV?
- Different lenders have different policies, so it’s a good idea to look around and compare terms. Some lenders may offer more flexibility but be mindful that a higher LTV often comes with higher home loan interest rates.
- If you can afford to borrow less then a smaller loan will naturally lower your LTV. While this may require you to adjust your budget, it could lead to better loan terms and a more manageable repayment schedule.
The LTV ratio is an imperative element when you apply for a home loan. Knowing how it impacts your loan terms helps you make informed decisions throughout the financing process.
When you’re prepared to move forward with your home loan application, keep your LTV in mind. A lower one can lead to more advantageous loan conditions. Take time to review your options carefully and seek advice from financial professionals to ensure you choose the most suitable option for your unique circumstances.
