What is the Ideal LTV Ratio and How Does It Impact a Home Loan Borrower?

With the rising prices of real estate across all major cities in India, it has become virtually impossible to purchase a house with a down payment. All your life you may have saved to make sure that your dream of owning a home comes true, but then somethings are beyond your control. However this does not mean that there is nothing you can do to change this. The best option that you have in such a scenario is applying for a Home Loan.

There are different Home Loan Types in India that are offered by financial institutions. Home Loans are a secured form of lending where your house is mortgaged with the lender until you repay the loan amount in full, along with interest. Different financial institutions have their own Home Loan eligibility criteria and based on how well your profile fulfils this criterion, your application is assessed.

Factors That Determine Home Loan Eligibility

Your application for a Home Loan is assessed based on various parameters set by the financial institution. It is important for the lender to be satisfied with your application to ensure that you can get the Home Loan. Some of the significant factors that determine your eligibility are:

• Credit Score: If your credit score is above the required level and your credit history is satisfactory, then the lender would consider your application favourably.
• Age: Most lenders would consider the age of 60 years as a cut-off. The repayment tenure of the loan is decided based on your age.
• Income: Higher is your income, more loan amount you are eligible for.
• Running Loans: Lenders consider the ratio of your income to your liabilities, before sanctioning your loan amount. If you have multiple loans running concurrently, your eligibility is reduced.

These factors play an essential role in establishing your eligibility for a Home Loan, but when it comes to calculating the amount that you are eligible for, lenders use a specific factor called LTV Ratio (Loan-to-Value Ratio).

What is LTV Ratio?

LTV Ratio is a risk assessment tool used by lenders to decide the amount of loan that could be extended against your application for a Home Loan and to make sure that they do not lend you more than the value of the property. In simple terms, it is the ratio of the loan amount that could be extended to the appraised value of the property.

The value of the property that you wish to purchase would be assessed by an approved valuer from the lender’s side and based on that value LTV is calculated. Most lenders accept an LTV ratio of up to 80% only, but there are some who consider LTV ratio of up to 90% also. Lenders prefer lower LTV ratio, as it minimises their risk as compared to a high LTV.

What Does It Mean for You?

LTV ratio plays a significant role in your Home Loan application, and you need to understand its various implications before applying for a Home Loan:

• A higher LTV means that the lender is willing to lend you a higher amount and that means you need to arrange for a lower amount of margin money. But it would imply that you would be paying a higher number of EMIs for a longer duration. It would also put a strain on your financial position as you need to pay a higher amount of money every month for a considerable number of years.
• Lower LTV means that the lender is going to offer you a lesser amount and in that case, you need to arrange for a higher amount of margin money. It can push your finances to the limit as organising for higher margin money is not going to be easy. But in the long run, it means that you need to pay a lesser number of EMIs,and the repayment duration would also be lower. It would not put a strain on your financial position as the amount to be paid per month would be lower.

What Do You Need to Do?

The calculation of LTV ratio is in the hands of the lender only and has nothing to do with you. So, you have to take a decision based on the following parameters:

• Financial Strength: In case the LTV ratio is lower than your expectations, you need to assess your capability to arrange more money for down payment and then take a decision. If you cannot arrange the higher margin, then you can file your application with another lender.
• Long-Term Planning: If you feel that you have a stable job and will be able to repay the loan amount before the completion of the tenure, then choosing lower LTV is a convenient option.
• Cost-Benefit Analysis: Assess the benefits and disadvantages of a higher/lower LTV carefully. You need to assess which option suits your financial position better.
• Check with Other Lenders: Before you apply for a Home Loan, check the LTV ratio of various lenders and then choose the one who can satisfy your requirements.

Buying your own home is one of the most significant decisions of your life, so you need to assess all the parameters, analyse their pros and cons, and only then make the final call.