Own house is the dream of almost everyone. For this, some people raise money throughout life and some people take loans from banks or any other financial institutions. However, it is not necessary that you will get as much loan as you need. Banks or financial institutions consider several points before approving any loan application. In this, not only the annual income is seen, but financial institutions also consider the credit score. Apart from this, another factor loan to value (LTV) ratio is very important, which determines how much loan will be received. Let’s know what LTV is and how it affects the loan application.
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LTV Ratio is extracted from a formula
A special formula is used to derive the loan to value or LTV ratio, (Amount borrowed / property value) X 100 = LTV ratio. In this, the lending financial institutions decide what the value of the property is according to the loan amount. For example, suppose you have to buy a house of 1 crore and the LTV ratio is 70 percent, then the bank can at most give you a loan of only 70 lakh rupees.
Let’s take another example, as you make a downpayment of 5 lakhs for a property of 30 lakhs and apply for a loan of 25 lakhs, the LTV in this case will be 83 per cent ((25 lakhs / 30 lakhs) * 100).
Due to low ratio, you get loan at better interest rate
Based on this ratio, banks fix the loan amount of the property value. Through this, the lenders ensure that the property for which they are lending is worth much less than the loan amount. If it is less then lenders can get loan at better interest rate. Apart from this, some rules get relaxed. It can be understood from the above example that if the downpayment is high then less loan amount will be required which will also reduce the LTV ratio and as a result you can negotiate with the bank for other terms including interest rate.
RBI guidelines on LTV
The central bank Reserve Bank of India (RBI) has issued guidelines to banks regarding LTV. According to this, the maximum LTV ratio for 30 lakhs or less can be up to 90 percent. For home loans ranging from Rs 30 lakh to Rs 75 lakh, there is 80 per cent LTV ratio and for home loans above 75 lakh there is 75 per cent LTV ratio. This ratio means that if you are buying a property worth more than 75 lakhs, then only 75% can be financed from the bank.
Source: www.financialexpress.com