What is Loan-to-Value (LTV) Ratio?

If you're a first-time homebuyer and planning to apply for a home loan, you will come across a term LTV or Loan-to-Value ratio. First thing first - till date, no bank in India has offered 100% financing of the property value. You get around 75% to maximum 85% of the property value as home loan while the remaining amount is paid out of your pocket. The LTV ratio helps you determine how much home loan you're eligible for and how much amount you have to pay out of your pocket. 

In this article, we have explained the concept of LTV ratio in detail so that you stay informed while applying for a home loan. Let's dive in! 

What is LTV Ratio?

The LTV Ratio for home loans represents the percentage of a property's value that can be financed through a home loan. Loan to Value Ratio is calculated by dividing the loan amount by the property's appraised value or purchase price, whichever is lower. For example, if you are planning to purchase a property that is priced at ₹1 crore and the banks LTV is 70%, you will be eligible for a loan amount of ₹70 lakh.

Banks will evaluate LTV ratio before approving a home loan to ensure they do not lend an amount that's higher than the property value. A higher LTV ratio could means higher lending risk for the bank and vice versa.

How is LTV Ratio Calculated?

To calculate the LTV ratio, divide the loan amount by the appraised value of the property and multiply by 100 to get a percentage:

LTV = (Loan Amount / Appraised Property Value) x 100

Significance of LTV Ratio on Home Loan Approval

The LTV Ratio plays a crucial role in determining whether lenders approve your home loan application or not. Typically, lenders have specific LTV limits that they are comfortable with based on their risk appetite and market conditions. Higher LTV Ratios indicate higher risk for lenders as it means borrowers need to finance a larger portion of the property's value through a loan. Therefore, lower LTV Ratios are generally preferred by lenders.

Table: LTV Ratio and Home Loan Approval Chances

In the table above you would see that as the LTV ratio drops, the chances of you getting a home loan improves. 

How Does LTV Ratio Impact Home Loan Eligibility? 

Let's say your income qualifies you for a high loan amount. However, banks may still cap the loan amount based on the pre-defined LTV ratio. Point to note: a lower LTV ratio could help you fetch home loans under favourable terms and conditions.

How to Negotiate for a Better LTV Ratio?

To negotiate a better loan-to-value (LTV) ratio for your home loan, consider the following strategies:

1. Improve Your Financial Profile

Strong Credit Score: A higher credit score can enhance your negotiating power, leading to better loan terms, including a higher approved LTV ratio.

Stable Income and Employment: Demonstrating financial stability through consistent income and employment history can make lenders more willing to offer favourable terms.

2. Increase Your Down Payment

Offering a larger down payment reduces the LTV ratio, which can lead to better loan terms and lower interest rates. For instance, if you can increase your down payment from 10% to 20%, it significantly lowers the LTV and may qualify you for lower rates.

3. Comparison Shopping

Approach various lenders to compare interest rates, fees, and LTV ratios. This not only provides insight into what different lenders offer but also gives you leverage in negotiations.

4. Negotiate the Purchase Price

If possible, negotiate a lower purchase price for the home. A reduced sale price will directly decrease your LTV ratio, making it easier to secure better loan terms.

5. Understand Lender Criteria

Be acquainted with the LTV limits set by the RBI based on property value. For example, properties below ₹30 lakh can have an LTV of up to 90%, while those above ₹75 lakh are capped at 75%. Understanding these limits can help you negotiate effectively within banks.

What is a Good Loan-to-Value Ratio?

Generally, a good LTV ratio is 80% or less. Higher LTV ratio indicates higher lending risk for banks. This may translate to higher interest rates and EMIs. Strive to pay more as down payment, at least more than 20%, to secure home loans at affordable interest rates.