Mastering Loan-to-Value (LTV) Ratio: A Complete Overview

When it comes to mortgage loans, which are essentially loans sanctioned against a residential or commercial property, borrowers must make the best efforts to avail themselves of the lowest possible interest rates. Low mortgage loan interest rates help keep loan EMIs affordable and ease the process of loan repayment. 

Credit score, quality of the collateral, income and job stability, existing debt-to-income ratio and LTV ratio are some of the factors that affect the mortgage loan interest rates in India. In this article, we discuss the importance of the LTV ratio in helping borrowers avail of the best mortgage loan interest rates in India. 

We also talk about the loan-to-value calculator and how it can prove helpful in helping one secure the best loan terms and conditions. So, if you are planning to apply for a loan against property in India, read on. 

What is the Loan-to-Value Ratio? 

When it comes to secured loans, lenders sanction only a percentage of the current market value of the property pledged as security as a loan. This is done to minimize the risk for the lender. 

The loan-to-value ratio, also known as the LTV ratio, is the ratio of the value of the loan to the value of the pledged property. The LTV ratio can be calculated using this formula: 

LTV Ratio = (Mortgage Loan Value/Appraised or Current Market Value of the Pledged Property) x 100

Why is the LTV Ratio Important in the Mortgage Loan Process in India? 

While deciding the rate of interest to be offered to a loan borrower, lenders take into account many different considerations. One such consideration is the LTV Ratio. 

When people opt for a high LTV ratio loan, the loan amount is high and therefore, the chances of a loan default are high too. Thus, when someone applies for a high LTV ratio loan, lenders generally charge a higher rate of interest to make up for the risk they are taking. 

On the other hand, when borrowers opt for a low LTV ratio loan, the risk for the lender reduces and thus, lenders charge a lower mortgage loan interest rate on such loans. 

Individuals applying for a mortgage loan must opt for a low LTV ratio loan to benefit from a lower interest rate and comfortable-to-pay loan EMIs. In any case, borrowers must always borrow what they need and not what they are eligible for. 

How Does a Loan-to-Value Calculator Help? 

The loan-to-value calculator is an online tool that helps loan borrowers calculate the loan amount that they are eligible for. 

Alongside that, it also helps borrowers calculate the total interest they will have to pay on the loan over the agreed loan tenor. The loan-to-value calculator requires borrowers to enter the following details: 

  1. To start with, you will be asked to declare whether you are self-employed or salaried. 
  2. After this, you will be required to enter the current market value of the property you plan to pledge as collateral. Many people make the mistake of over-assessing the value of their property.
    If you want, you can hire an expert to help you correctly assess the value of the property against which you plan to avail yourself of a loan.  
  3. Select whether the property you plan to pledge as collateral falls under the bracket of residential or commercial property. 
  4. Select your desired loan tenor or the number of years you want to comfortably repay your loan. 
  5. Finally, enter the mortgage loan interest rate you are being offered by your lender. 

Once these values go into the calculator, the loan to value calculator will calculate the loan amount you are eligible for. To establish candidature for the most lucrative loan terms and conditions, apply for a loan amount you are eligible for. 

Final Words

High LTV ratio loans invariably lead to lenders charging a higher rate of interest, which in turn leads to unaffordable loan EMIs. High loan EMIs can become difficult to pay, especially during times when is feeling financially over-stretched. 

Thus, high LTV ratio loans increase the chances of loan default. Consequently, borrowers must make the best efforts to avail themselves of the lowest mortgage loan interest rates possible by pledging high-quality collateral, maintaining a good CIBIL score and a stable income and opting for a low LTV ratio loan. 

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