Importance of LTV ratio in Home Loan

Several factors are considered before buying a residential property with the help of a home loan. One of them is the LTV or Loan-to-Value Ratio. This will determine the maximum loan amount that will be loaned to you by the bank or other financial institutions. 

LTV for Home Loans

The Loan-to-Value is the financial term used by the lenders to express the ratio of a loan to the value of an asset purchased. It may vary among various banks and financial institutions. It will usually be in the range of 75% to 90% of the cost of the property. It also depends on the borrower’s relationship and track record with the lending institution.

Pros and Cons of LTV

There are many pros and cons of a higher and lower Loan-to-Value Ratio. If you are sanctioned a higher LTV, in that case, your down payments will get lowered, but your EMIs will be higher because your loan amount is greater.

On the other hand, if you are sanctioned a lower LTV, it means that you need to pay a higher down-payment, monthly EMIs, in this case, will be much lower as a loan amount is lower.

The Ideal LTV Ratio

While applying for home loans, you also need to consider how much LTV you can expect. Therefore, it is important to do a cost-benefit analysis of your financial situation first, and then decide how much loan amount you will be applying for. Remember, the higher the home loan you apply for, the lower will be your down-payment and vice versa. A higher loan amount would mean a longer tenure, while a smaller loan amount would mean your tenure will get over early.

The rate of interest offered on home loans should also be considered while determining an LTV. It will help you to decide, whether you should choose a higher LTV or a lower LTV. If the interest rate on the home loan is higher, it may make sense to choose a smaller home loan amount but a larger down-payment. If you have sufficient funds in your hand and you can afford to make a larger down-payment. In that case, choosing a lower LTV would help you save money on the interest and EMI and shorten your loan tenure. However, if you do not have enough savings to make a higher down-payment amount, then you would have no choice but to apply for a larger home loan amount, which means a higher LTV ratio.

Slabs and limits of Home loan LTV

The Reserve Bank of India (RBI) has set certain slabs and limits to the LTV of a home loan. They are given below:

  • LTV of up to 90%: For home loans of up to Rs. 30 lakhs
  • LTV of up to 80%: For home loans between Rs. 30 lakhs and Rs. 75 lakhs.
  • LTV of up to 75%: For home loans above Rs. 75 lakhs.

Factors that determine LTV and Home Loan eligibility

Several factors are there that help you to determine LTV and your eligibility for home loans-

Credit history: Your credit score or credit history will play a large role in deciding your eligibility for home loans and chances of getting a higher LTV. The higher your credit score, the higher will be your chances of getting your home loan approved without any delays. and lower interest rates, along with speedier approvals.

Age: Your age will play a prominent role in your home loan approval process. The average age given by banks as a cut-off to finish repaying a home loan is 60 years. It means that the older you are at the time of applying for a loan, the lesser number of years you have to repay it, as compared to when you have applied for a loan when you are younger. Having a longer time to repay the loan increases your loan eligibility substantially, whereas having a fewer number of years to repay it can bring down your eligibility and LTV as well.

Total liabilities: The total debt/liabilities are the ratio of all your current debts to your total income from all sources. It means that if you already have many ongoing loans that are in being repaid, then the amount of home loan you get sanctioned may be lower than what you expected.