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A loan-to-value (LTV) ratio in home loan is the percentage of the property value that a bank or financial institution can lend to a property buyer. Lenders examine the LTV ratio before approving a home loan to ensure that they do not lend an amount that is higher than the property’s actual price. An increase in the LTV raises the borrower’s perceived risk while a lower LTV ratio can get you better terms, including interest rates, on your home loan.
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.1 crore and the LTV ratio of your bank is 70%, then the maximum amount of loan that you can avail is Rs.70 lakh.
According to the guidelines issued by the Reserve Bank of India (RBI), the LTV ratio for home loans can go up to 90% of the property value for loan amounts of Rs.30 lakh and below. For loan amounts that are above Rs.30 lakh and up to Rs.75 lakh, the LTV ratio limit has been set to up to 80% while for loan amounts above Rs.75 lakh, the LTV ratio can go up to 75%.
This implies that if the LTV ratio is 90%, you will have to pay at least 10% of the property value from your pocket and rest of the amount can be funded by taking a home loan. LTV ratio is needed to calculate the minimum down payment that you would have to make towards purchasing a home or property.
Your eligibility for a home loan will be higher if the LTV ratio is lower. Your chances of getting better terms on your home loan, which included the interest rate, will also be enhanced if the LTV ratio is low. Your lender will inform you of the LTV ratio when you apply for a home loan and if it is towards the lower side, you can negotiate with the lender to offer you lower interest rates, longer repayment tenure, etc. Lower LTV ratios may fetch you lower home loan interest rates simply because the risk associated with lending to you is lower.
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