When you set out to avail a home loan or a loan against property, there are various terminologies that you come across, like down payment, prepayment, etc. One of the common terms used is loan-to-value ratio (LTV). Your LTV ratio impacts your eligibility and also has a role in determining the amount of loan you can avail. Therefore, you must know about loan-to-value ratio before applying for loans.


What is a loan-to-value ratio?

The loan-to-value ratio is the maximum amount that the lender would lend as a loan against the market value of the property that acts as a collateral for the loan. It is the ratio of current market value of the property and the sanctioned loan amount. LTV is an important determinant of your EMI as it helps lenders judge the risk associated with lending you money. Lenders consider the LTV to ensure that they do not lend more money than the actual price of the mortgaged property.


The LTV is calculated by the following formula -

LTV ratio = Amount borrowed/ property value x 100


For example, if the value of your mortgaged property is one crore and your LTV is 65%, the maximum loan amount you can avail is Rs 65 lakh.  If your property is located at a prime location and is newly constructed, you can get a better LTV, as the lender is most likely to get a good value for such property in case they need to sell it to recover the loan amount. 


What are the RBI guidelines for LTV?

Recently, the Reserve Bank of India rolled out some guidelines for lenders, related to LTV. According to the mandate, if the loan value is Rs. 30 lakh or else, the maximum LTV can be 90% of the property value. If the loan value is between Rs. 30 lakh and Rs. 75 lakh, the LTV can go up to 80% of the property value. Similarly, for loans above Rs. 75 lakhs, the maximum LTV ratio can be 75%.


How does it affect your eligibility?

Your LTV ratio is a measurement of the risk that the lender bears in lending you the loan. It is a comparison of the loan amount with the collateral value. It is better if you have a low loan-to-value ratio to improve your loan against property eligibility. A low LTV means you are a low-risk borrower, which enhances the chances of you getting attractive benefits and features, including lower loan against property interest rates.


This loan-to-value ratio determines if you are a low-risk borrower or a high-risk borrower. It does not only help determine your eligibility but also your loan value. If you are looking forward to taking a loan against property, you can ascertain the amount you would get as a loan by calculating loan-to-value ratio.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.