What is the Importance of Loan to Value Ratio in Loan Against Property?
documents for LAP loan
One of the biggest investments people make in their lifetime is buying their own home. Due to the investment volume, potential buyers often opt for a home loan to support their decision.
Home finance companies often cover a substantial portion of the value for which the property is purchased. The remaining value should be paid by the investor as a deposit. The home loan is then gradually repaid over a certain period through EMI (Equated Monthly Instalments).
The loan-to-value ratio can be used to assess the portion of a property’s value that a home loan can cover.
What is the loan-to-value ratio?
The loan-to-value ratio, or LTV ratio, is the amount of money you can borrow compared to the actual value of your property. The LTV ratio gets calculated as a percentage. It depends on several factors, such as the loan type and the relationship between the borrower and the lender.
A higher LTV ratio means a bigger loan; consequently, the amount the investor has to finance will decrease. In the case of a lower loan-to-value ratio, the amount that the investor will finance to purchase the property will be higher, but the loan will be lower.
What is a good loan-to-value ratio?
Typically, 70-90% of the property’s value can be financed with a loan – a common LTV ratio.
The mortgage loan-to-value ratio also varies by property type. For example, it is generally higher for residential properties compared to commercial properties. However, some exceptions exist, as industrial properties may have a high loan-to-value ratio.
Other factors affecting the loan-to-value ratio are age, credit score, financial situation, documents for LAP loan, salary, and work experience of the investor. If the investor has a stable job and has worked for a long time or has a good salary package, there is a chance of a higher LTV ratio. In addition, a credit score above 750 can help achieve a higher LTV ratio. Investors can use a loan-to-value calculator to calculate their LTV ratio.
What does LTV mean for a mortgage?
In the real estate market, when a person buying a property does not have the funds but has an existing property, they can approach a lender and get a mortgage loan. In this case, the collateral would be the real estate, and the loan value will be a percentage value of the real estate. This percentage is called the mortgage LTV, calculated using the loan-to-value calculator. Borrowers can use a loan-to-value mortgage calculator or the formula to calculate their LTV.
Loan-to-value formula
The LTV ratio gets calculated using the following loan-to-value formula:
Loan-to-value ratio = principal (loan amount sanctioned) / market value of your property x 100.
Investors can use this loan-to-value formula or a loan-to-value calculator to determine the LTV ratio offered by home finance companies.
Why is the LTV ratio important?
As a borrower, a high loan-to-value ratio would mean paying higher EMIs. Some lenders recommend taking out private mortgage insurance against larger loans. This would also lead to higher EMIs. A lower LTV ratio leaves enough room to budget for additional expenses if the investor has the funds to cover the down payment.
The investor’s existing liabilities (like other loans) are considered and compared to their monthly income to determine the best possible LTV ratio. This helps the lender to offer a loan amount that the borrower will be able to repay.
Lenders prefer home buyers with a lower LTV ratio as it reduces credit risk on the lender’s side. Planning for a lower LTV ratio means getting a smaller loan and securing enough funds to finance the remaining value of the property.
For example, if an investor wants to buy a property worth Rs. 80 lakhs with an LTV ratio capped at 60%, the loan amount will be Rs. 48 lakh, and the self-financing amount required will be Rs. 32 lakh. However, if the investor has only funds of Rs. 30 lakhs and still wants to maintain an LTV ratio of 60%, the value of the property they can invest in will have to be limited to Rs. 75 lakh.
Being clear about the LTV ratio and using an LTV calculator can help investors plan their investments accordingly. Also, be sure about the documents for the LAP loan.
Conclusion
Understanding loan-to-value ratios can help investors plan their real estate investments. Choosing a home loan that provides the most optimal loan-to-value ratio ensures a smooth investment.
