Loan-to-value ratio

Loan-to-Value Ratio: What it Means For a Property Loan

A loan-to-value (LTV) ratio in a property loan is a measurement that compares the amount of credit available against the appraised value of the asset. The higher the down payment, the lower will be the LTV ratio. Loan against property lenders often uses the LTV ratio in order to determine whether they can lend the money or if they require any private mortgage insurance. In general, lending institutions use the LTV ratio to analyse the amount of risk associated with any credit option.

How to compute the loan-to-value ratio?

The loan-to-value ratio in LAP is computed by dividing the amount of loan by the determined value of the pledged property and multiplying the result by 100.

Here is the formula to compute loan-to-value:

Loan-to-value (LTV) = (Principal amount of loan (borrowed sum) /current market value of the property) x 100

Suppose an individual has applied for a loan against property by keeping his/her house as collateral. Now, after verification of that person’s property and documents, the lending institution tells him/her that the current market value of the collateralised house is Rs.40 lakhs, and the person can borrow a maximum amount of Rs.30 lakhs against it. Under such circumstances, the LTV ratio on LAP will stand (Rs.30 lakhs/Rs.40 lakhs) X 100, i.e., 75%.

While computing the LTV ratio for a property, it is better to use an LTV ratio calculator since computing this ratio manually can cause errors.

What is a loan-to-value (LTV) calculator and how to use it?

The LTV calculator is an online instrument which helps an individual figure out the ratio of the loan amount an individual decides to borrow against his/her property value. Here is the step-by-step process to use the LTV calculator:

Step 1: Visit the official portal of a preferred lender 

Step 2: After this, borrowers have to choose the type of asset

Step 3: Then the person needs to enter the estimated market value of the asset which he/she will be pledging as collateral.

Step 4: After entering these details, one can check the eligible amount of loan against the value of the property

Which factors affect the LTV ratio in property loans?

Following are the common factors that affect the loan-to-value (LTV) ratio of a loan against property:

  • Type of property 

This is one of the most important factors that affect the LTV ratio of a property loan. Compared to commercial properties, the loan-to-value (LTV) ratio for residential properties is higher.

  • Age of property 

The age of the collateralised property also influences the LTV ratio of a LAP. By pledging old houses or buildings, borrowers can get a lower LTV ratio compared to the newer ones.    

  • Lender

The LTV ratio for a loan against property varies from one lender to another. Hence, borrowers must conduct thorough research before finalising a preferred lender. 

  • Credit score 

Individuals having a healthy credit score of 750 or above get higher loan-to-value ratios from lenders and vice versa.

  • Occupancy status

It is better to mortgage a self-occupied property rather than a rented or vacant space since the former attracts a higher LTV ratio.

Knowing how the loan-to-value ratio (LTV) impacts a property loan, may help borrowers in their credit application process. However, must fulfil the eligibility parameters of LAP in the first place. 

Know eligibility criteria for a loan against property

The eligibility criteria for LAP vary from one lending institution to another. Mentioned below are the common eligibility parameters that every borrower must follow:

  • Applicants must have Indian citizenship
  • Age of the salaried applicants must be between 22 years and 58 years
  • Age should be between 25 years and 70 years of self-employed borrowers
  • Borrowers should have a CIBIL score of 700 or above
  • Applicants must be salaried individuals or self-employed professionals like chartered accountants, doctors, etc.
  • Salaried individuals must have a monthly income of up to Rs.30000.

Once an applicant meets all the above-mentioned eligibility requirements, he/she can proceed towards the process of documentation.

What are the supporting documents required for a property loan?

Mentioned below are the supporting documents required to be provided by both salaried and self-employed borrowers while availing a LAP: 

  1. Self-employed persons
  • ID proof documents (PAN card, Aadhaar card, passport, voter ID card)
  • Address proof (Aadhaar card, electricity bill, voter ID card, rental agreement)
  • Income proof (bank statements for last 6 months, profit and loss account, balance sheet)
  • Proof of business
  • Property papers
  • Income Tax Returns (ITR)
  1. Salaried persons 
  • ID proof (Aadhaar card, voter ID card, PAN card, passport, driver’s licence)
  • Address proof (Aadhaar card, electricity bill, voter ID card, ration card)
  • Income proof (salary slips for last 3 months, bank statements for last 3 months) 
  • Property documents
  • Form 16
  • Income Tax Returns (ITR)

After fulfilling the eligibility requirements and gathering the necessary documents, applicants can easily go through the application process for a loan against property.

Many reputed lending institutions bestow pre-approved offers on plenty of credit options like home loans, property loans, etc. This helps in advancing the overall lending process. Individuals eligible to opt for these facilities can easily check their pre-approved offers online by providing their name and contact details.  

While availing a property loan, one must keep an eye on the loan-to-value (LTV) ratio that the lending institution is offering. Usually, it is sensible to go for the lender providing the highest LTV ratio. However, if an individual is on the lookout for a better interest rate deal from his/her lender, getting a loan with a lower LTV ratio can be ideal.

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