LTV or Loan-to-Value ratio, is a financial term used by loan providers to express the ratio of the loan amount to your asset, which is submitted as your collateral. The LTV ratio plays a crucial role when it comes to loan approvals and interest rates. Banks and financial institutions use this ratio before approving loans—especially home loans or gold loans—to ensure they are not lending more than the property’s actual value. This helps them stay within the prescribed LTV limits for different loan types and manage financial risk effectively. Lower the loan to value, lower the risks for your lenders, and better the chances of getting your loan approved. You will have a better chance at negotiating interest rates and flexibility in other charges.
| The full form of LTV is Loan-To-Value ratio, which is a simple ratio between your loan amount and the asset value. |
Effects of LTV on Your Loan
Loan to value plays an important role in determining an individual’s loan eligibility, especially against collateral. It can make a significant difference as it impacts:
- Your interest rates
- Or Influences your loan approval chances
- Can determine your payment tenure and downpayment schemes
- And Influences insurance requirements (in some cases)
A higher Loan to value is considered high risk and can also affect your loan approval. You might also need to pay for Private Mortgage Insurance (PMI) if your loan to value is above a certain threshold (typically 80%).
| LTV Ratio Range | Impact on Loan Approval | Additional Costs |
| Below 50% (Very Low Risk) |
Easier approval, best interest rates | Nil |
| 50% – 70% (Low Risk) |
Favorable loan terms, lower interest rates | Nil |
| 70% – 80% (Moderate Risk) |
Loan approval is likely, and slightly higher interest rates | Nil |
| 80% – 90% (High Risk) |
Stricter approval criteria, higher interest rates | May Require PMI |
| 90% – 100% (Very High Risk) |
Difficult approval, significantly higher interest rates | PMI Required Strict Conditions |
| Above 100% (Extremely High Risk) |
Rarely approved, major financial risk | Not usually offered by lenders |
Higher LTV, therefore, can put you in stressful loan practices.
LTV Calculator & Calculations
An LTV calculator can aid you in finding how good the loan-to-value ratio is, which can help you understand and plan accordingly.
This can be done using two values and a simple formula.
- Loan Amount
- Appraised Value of Asset and
- The Loan to Value formula
|
LTV = (Loan Amount / Appraised Value of Asset) x 100 or LTV = (Loan Amount )/(Appraised Value Of Asset ) ✕ 100 |
For example, if the two amounts are
- Loan Amount: ₹5,00,000 and
- Property Value: ₹6,50,000,
then your LTV = (5,00,000 / 6,50,000) x 100 = 76.92%
In short, lower LTV for borrowers often means better loan terms.
Pros and Cons of Higher LTV
Having a higher LTV is not entirely evil, as you can benefit from it too. However, there are some bad effects of higher LTV, which can put the users under stress if not careful.
Pros of Higher LTV
1. Lower downpayment: if you are someone who doesn’t want to make a hefty downpayment, a higher LTV wouldn’t be a problem.
2. Access to certain loans: Controversially, some lenders offer higher LTV loans to help borrowers who don’t have a large amount of savings. However, this is a less probable benefit.
3. Faster loans: For people who are in urgent need of a loan and don’t have a downpayment, this can be useful.
Cons of Higher LTV
1. Higher interest rates: Borrowers often find themselves with higher interest rates on loans as most lenders consider high LTV as risky.
2. Stricter eligibility criteria: Banks may require a higher credit score or additional financial proof for high LTV loans.
3. Increased risk in equity: If asset value drops, borrowers would fall into a situation where they would have to pay more than the actual asset value.
4. Mortgage Insurance Requirement: Loans with LTV above 80% often require Private Mortgage Insurance (PMI), increasing borrowing costs.
5. Higher EMI payments: This is directly proportional to the loan amount, including interest rates; hence, the higher the interest rate, the higher the monthly repayment.
Important Guidelines on LTV by RBI
The Reserve Bank of India (RBI) has set certain guidelines for various types of loans, especially concerning sensitive ones like housing and gold loans. These guidelines are designed to manage risk in the financial system and protect borrowers. They could change periodically, depending on the market conditions.
It’s crucial to check the latest RBI circulars and regulations for the most up-to-date information. Here is some key information regarding Loan to value:
| Loan Amount | Maximum LTV Allowed |
| Up to ₹30 lakh | Up to 90% |
| ₹30 lakh – ₹75 lakh | Up to 80% |
| Above ₹75 lakh | Up to 75% |
Tips to Lower the LTV Ratio
As discussed, lowering your loan to value is important to help you secure a loan at more favourable terms. Here are some tips you can follow to do so:
- Make a Larger Down Payment
The more you pay upfront, the lower your loan amount and, consequently, your loan to value. This is because when you pay off a higher amount as a downpayment, your total loan amount decreases.
- Choose a Less Expensive Asset
Buying a more affordable property or asset means you won’t need to borrow as much, which helps keep your Loan-to-Value (LTV) ratio lower.
- Increase Property Value
Improving the asset (like renovation) can increase its appraised value, lowering the LTV. As per the equation, if you have a higher asset value and a lower loan amount, your loan to value will be low.
- Pay Off Existing Loan Balance
If possible, reduce the outstanding loan before applying for a new credit card. With debt consolidation, you can close existing loans and make way for new credit approvals.
- Wait for Property Appreciation
If real estate prices are rising, waiting a bit before borrowing could naturally lower your LTV. This happens as the required loan amount stays the same, but your asset value increases, lowering the Loan to value.
LTV and FOIR
The Loan to Value ratio and the Fixed Obligation to Income Ratio (FOIR) are closely related when lenders assess the applicant’s financial credibility. While LTV helps understand the value of the collateral, FOIR helps understand the income and the repayment capabilities of the borrower.
To calculate FOIR, you need two values and a formula:
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For example, if your monthly income is ₹50,000 and you have fixed obligations (rent, EMI, etc.) of ₹20,000, then your FOIR will be 40%.
Like LTV, a lower FOIR suggests better financial health and a higher ability to take on debt. Most lenders prefer FOIR to be below 50% when applying for loans.
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Frequently Asked Questions
Q. What does LTV mean?
A. LTV stands for Loan-to-Value ratio. It represents the ratio of the loan amount to the asset’s current market value.
Q. How is LTV calculated?
A. LTV can be calculated using the formula: (Loan Amount / Appraised Value of Asset) x 100.
Q. What’s the relationship between LTV & FOIR?
A. LTV and FOIR are two key factors considered by lenders when assessing your loan application. It helps the lender understand your asset value, while FOIR is used to assess your repayment capability.
Q. What does 80% LTV mean?
A. An 80% LTV means you’re borrowing 80% of the asset’s value. For example, if a property is worth ₹1,00,000, an 80% LTV would mean getting a loan of ₹80,000.
Q. Is 100% LTV good?
A. Taking out a 100% LTV loan means borrowing the full asset value, posing higher risks for both lender and borrower due to the absence of a safety cushion and potential negative equity. These loans are rare with stringent conditions.
Q. How do I check my LTV?
A. Your lender will inform you of the LTV during the loan application process. They’ll appraise the asset and determine the loan amount based on their policies. You can also calculate it yourself if you know the loan amount and the appraised value.
Q. What is the LTV rule?
A. The “LTV rule” sets limits on how much banks can lend against an asset, as regulated by central banks like the RBI. These rules help control financial risk and maintain stability limits vary based on loan type and economic conditions. Always check the latest guidelines from the official financial authority.
