pnb housing
January 23rd, 2023

What is Loan-to-Value (LTV) Ratio & Its Importance in Home Loan

Most prospective homebuyers will eventually fund their purchase with some housing finance. Apart from providing financial support, getting a loan also has several benefits, like tax exemptions, savings kept intact, and improved credit scores. However, financial institutions can fund up to 90% of the property’s cost, and the borrower must pay the remaining amount as a down payment. The percentage of the home’s price that the lending institution funds is called it’s LTV (Loan to Value) ratio and the loan amount a loan seeker may borrow is called eligibility.

Those planning to apply for a housing loan must thoroughly understand what an LTV Ratio for Home Loan is and how it affects their eligibility. 

What is LTV Ratio?

LTV, or the Loan-to-Value ratio, is the ratio of the loan amount an applicant is eligible to borrow against the desired property’s total market value. The formula is: 

LTV Ratio for Home Loan = Borrowed amount/ Value of the Property X 100

Suppose you purchase a property worth 1 crore and the financial institution offers you 80 lakh, the LTV is 75%.

Role of LTV Ratio in Determining Eligibility 

Experts suggest using a Home Loan eligibility calculator, an online tool that calculates the appropriate loan amount. It factors the applicant’s income, financial obligations, property price, down payment, and other parameters to suggest the eligible home loan amount. 

Must Read: How To Get A Home Loan Approved Instantly?

LTV Ratio for Home Loan

The RBI has set different LTV limits and slabs for Home Loans based on the home’s cost. These include the following:

  • LTV of up to 90% for homes costing below ₹ 30 lakh
  • LTV of up to 80% for homes costing between ₹ 30 lahks and ₹ 75 Lakh
  • LTV of up to 75% for homes costing above ₹ 75 Lakh

Remember, the slabs are the maximum LTV ratio an applicant can get. Lending institutions determine the final eligibility of an application based on several factors making up their Home Loan eligibility criteria. These include the applicant’s age, income, financial liabilities, credit rating, property market value, etc.

Pros and Cons of a High LTV Ratio

A high LTV ratio for a Home Loan provides the benefits of a bigger loan amount, requiring the borrower to spend a minimum from their pockets. However, opting for a high LTV has some cons as well. 

When an applicant gets a higher LTV ratio, the major advantage is that the required down payment reduces significantly. However, the EMI amount increases due to the greater loan amount. In contrast, a lower LTV ratio means the need for a bigger down payment. However, that reduces the loan burden and keeps the EMI amount lower. A Home Loan EMI calculator is the best online tool that calculates EMI amounts for different loan terms, allowing borrowers to choose a loan term with budget-friendly EMIs.

Must Read: What are CERSAI Charges on Home Loan

What is the Ideal LTV Ratio?

When checking Home Loan eligibility and LTV ratio, doing a little cost-benefit analysis based on the borrower’s financial situation and checking up on the home Loan documents required is essential. Remember, the higher the loan eligibility, the lower the down payment requirement, and vice versa. A bigger loan amount will mean an extended loan tenure or bigger EMIs, while a smaller loan will make EMI repayment smaller. 

Home Loan interest rates are also crucial in borrowing a loan with the right LTV ratio. If the interest rates are higher, it makes sense to borrow less by making a bigger down payment. If the borrower has funds to make a bigger down payment, they must opt for a lower LTV ratio to save money on interest, reduce the EMI amount, and shorten the loan tenure. However, if the available funds are limited, opt for a higher LTV ratio to borrow a bigger loan.

You may choose a larger loan amount and a higher LTV based on your current needs. You can always prepay the loan amount later if you have extra money. There are no pre-payment charges for a Home Loan taken by an individual. However, it is recommended that you check the pre-payment terms and conditions with the respective financial institution before applying for a Home Loan.

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