Home loan is a secured loan that requires you pledge the property to be purchased/ constructed/ renovated/ extended as collateral with your lender. But you do not get the entire value of the asset pledged as a loan and this is where the LTV ratio comes in the picture.
What is Loan-to-Value (LTV) Ratio in Home Loans?
Loan to Value Ratio (LTV) refers to the proportion of the property value that you can finance through your loan. It is always expressed in percentage. The remaining value of the property has to be contributed by the homebuyer from his own sources.
So, if you are buying a home property costing Rs. 1 crore, and your lender is offering you an LTV ratio of 65%, then you will get a home loan of Rs. 65 lakh and the remaining amount of Rs 35 lakh has to be contributed by you in the form of down payment.
Note: Property value is not the sole factor that determines the loan amount. Lenders also consider other factors such as your repayment capacity and the condition, age, location and nearby infrastructure of the property while deciding the loan amount.
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RBI Guidelines on LTV
The Reserve Bank of India (RBI) has capped the LTV ratio for banks and HFCs at 90% for home loans up to Rs. 30 lakhs, at 80% for home loans between Rs. 30 lakh and Rs. 75 lakh and at 75% for home loans of above Rs 75 lakh.
| Loan Slab | LTV Ratio |
| Up to Rs. 30 Lakh | 90% of the property value |
| Between Rs. 30 Lakh & Rs. 75 Lakh | 80% of the property value |
| More than Rs. 75 Lakh | 75% of the property value |
How is having a Lower LTV Ratio better?
Increases your eligibility for availing a home loan
Besides the RBI’s regulatory caps based on the property value, the final LTV ratio also depends on the applicant’s credit risk assessment by the lender. Banks and NBFCs offer higher LTV ratio to applicants having lower credit risk and lower LTV ratio to those having riskier credit profiles. Thus, applicants having higher credit risk should accept a lower LTV ratio if offered by the lender. Doing so will increase their contribution towards home down payment, thereby decreasing the prospect of a lender bearing the loss in case of loan default and increasing the applicants’ home loan eligibility.
Helps in availing home loans at lower interest rates
Some lenders use LTV ratio while setting home loan interest rates. They offer lower interest rates to applicants opting for lower LTV ratios as such applicants pose lower credit risk for lenders. Moreover, lower LTV ratios translate to lower loan amounts, which in combination with lower rates can significantly reduce your overall interest cost. Thus, applicants having sufficient surplus should opt for lower LTV ratios. However, while doing so they should not compromise their emergency funds, investments and contributions made towards meeting your crucial financial goals. Liquidating them might force applicants to avail loans at higher interest rates for meeting the same financial goals in future.
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