How is Loan to Value beneficial for you?

Possessing any asset, be it a house or a car; gives a great sense of joy and accomplishment. When used smartly and responsibly, a loan is a great route to purchase an asset of your choice. Rather than paying a lump sum and locking your finances, repaying a loan via EMIs can help you utilize your money elsewhere. However, before applying for a loan, it is advisable to understand the working and calculation of the loan. One such important aspect is the LTV Ratio. Put simply, it is a ratio of the loan amount to the value of the asset. LTV ratio ensures that the lender doesn’t finance more than the asset value. A low LTV is considered good for both the lender and the borrower.

What is a Loan to Value Ratio?

The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. A high LTV for lenders means that they are lending a bigger loan amount proportionate to the value of the asset. For borrowers, a high LTV could mean that they have made a lower down payment. Thus, the associated risk increases for the lender, and such high LTV ratio loans come with a higher interest rate. A low LTV means that the borrower has made a large down payment and hence he/she is borrowing less from the lender. In such cases, the associated risk decreases for the lender and he/she can get better terms, including interest rates, on the mortgage.

To sum up, a high LTV is not considered good and vice versa.

How is LTV Ratio Calculated?

The LTV ratio is calculated by lenders using the below-given formula:

LTV Ratio (%) = Amount Borrowed/Property Value X 100

For example, if you wish to buy a house worth Rs.10 lacs and the LTV ratio of your bank is 70%, then the maximum amount of loan that you can avail of is Rs.7 lacs.

What does a Loan to Value Ratio Mean to Borrowers?

High LTV Loan

As mentioned earlier, a high LTV ratio means higher risk for the lender and increased cost for the borrower. A high LTV loan could mean some or all of the following:

You have paid a low down payment.
Your monthly loan repayment is higher.
Your income proofs are not proportionate to the loan amount you are applying for.
You have to pay higher mortgage insurance premiums if any.

Low LTV Loan

A low LTV loan means that you are more invested in your asset. A low LTV loan could mean some or all of the following:

You have paid a higher amount as a down payment.
Your monthly loan repayment is lower.
Your income proofs are sufficient for the loan amount you are applying for.
You can enjoy discounts on your mortgage insurance premiums if any.

How Can You Lower Your LTV?

A low LTV ratio means better benefits. Here are some of the ways you can lower your LTV and enjoy better terms and benefits:

Make a bigger down payment: If you have surplus cash, you could make a large down payment.
Make Extra Loan Repayments: If you are servicing 12 EMIs, you could consider making a couple of extra EMI payments. Your LTV ratio drops with every mortgage payment.
Select a Short Tenure Loan: If you are comfortable with a higher monthly EMI, a short-term loan will lower your LTV faster than a longer-duration loan.
Buy a less Expensive Asset: If possible, consider buying a less expensive house or vehicle as this can help you avoid a high-LTV ratio loan.