What is Loan To Value and how it can be beneficial for you?

The Loan to Value or LTV ratio is a term lenders use to determine the value of a loan/finance they can provide to a borrower. An LTV ratio can be identified for loans such as Home Loan, Gold Loan and a few others.

This ratio is used by all Financial Institutions to identify/assess the risk associated with giving a loan to a borrower. It is used to assess how much amount of a loan is given to a borrower based on the Gold they have pledged (subjected to fluctuating gold rates, a buffer is considered) or the home financing the borrower requires. So that the lenders do not lend higher than the actual price of the asset.

How is LTV calculated?

To determine the LTV ratio, divide the loan amount by the value of the asset, and then multiply by 100 to get a percentage: LTV = (Amount borrowed ÷ Value of the asset) × 100 = LTV ratio percentage.

For example: If the house is valued at Rs. 50 lakh and your lender’s LTV is 60% then the maximum loan you can get upto Rs. 30 lakh.

RBI guidelines on LTV 

RBI states that in the case of home loans for Rs. 30 lakh or less can go up to 90% of the property value. This clearly means that the borrower will have to shell out at least 10% from his pocket for the down payment while the rest amount can be financed by the lender.

(With Fedfina, a Gold Loan can be availed for the rest of the down payment that needs to be added from the borrower’s side.)

Such loans shall attract a risk weight of 35% where LTV is less than or equal to 80 % and risk weight of 50% where LTV is more than 80%, but less than or equal to 90%.

For loans between Rs. 30 lakh – Rs.75 lakh, the LTV ratio can go up to 80% while for loans above Rs. 75 lakh, the required LTV ratio is 75%.

How low LTV can give you high benefits              

Experts believe that if the LTV ratio is lowered; there are fewer risks involved, you can get for better deals on interest rates and other necessary items can be adjusted.

Whenever you are applying for a loan from any FI, the lender will inform you about the LTV. It is highly suggested that you make most of the down payment yourself in the case of Home Loans so that the lesser is the risk to the lender.

Visit https://fedfina.com/ if you want to check your LTV for a loan application. Fedfina provides loan services for Gold Loan, Home Loan, Business Loan & LAP (Loan Against Property).