Loan-to-Value Ratio in Home Loans: Calculation

Date: 05th August 2024 | Read time: 2 Minutes

When applying for a home loan, one needs to be familiar with the LTV ratio. It determines the amount of loan you are eligible for and under what terms. In this blog, we will discuss what the LTV ratio means and how it works, affecting your eligibility for a home loan.

The LTV ratio is a financial term used by the lenders while expressing the ratio of a loan with respect to the value of the asset purchased. In relation to a home loan, the LTV ratio depicts the percentage of value a lender is willing to finance on a property.

For instance, if you buy a house worth INR 50 lakhs with the LTV ratio from a lender of 80%, you can get a loan for up to INR 40 lakhs. You will have to pay the rest, INR 10 lakhs, as margin money or down payment. Since the LTV ratio is higher, the more you are able to borrow, the less you will have to pay up front, and the greater your interest rates.

[Also Read: How Home Loan Eligibility is Calculated? ]

The LTV ratio has a significant impact on your eligibility for a home loan. With an increased LTV ratio, you can borrow more but probably at higher interest rates. A lender may treat a higher LTV as a higher risk since you are contributing less equity to the property.

Additionally, your credit rating, income, and current liabilities also decide the amount of LTV that your lender can sanction. A robust financial profile may be able to bring you a better LTV ratio for financing your home purchase.

The LTV ratio is hence one of the major deciding factors of the amount you can get as a home loan. Knowing what your LTV ratio is, will definitely help in planning your finances much better to afford the down payment and letting the loan be manageable. You will hence make your decisions wisely, with full awareness of the LTV ratio, and gain the best possible terms for a home loan.