Understanding the Confusing “Loan to Value Ratio”

Sumit, a senior software engineer in a popular MNC in Bangalore, decided to buy a house worth 80lakh, in one of the most posh areas of the city. However, when he approached a bank for a home loan, he was surprised when they only offered him Rs. 65 lakh as the loan amount. He had only 10 lakh in his savings, and he needed at least Rs. 70 lakh to make the purchase.

Sumit was greatly surprised, as his income was really good, and so was his CIBIL score. He couldn’t understand why the bank would grant him a lower amount. Confused, and disappointed, he decided to approach another bank,  where he was again surprised when they offered him a loan of Rs. 71 lakh.  How the loan amount is decided by the banks, was totally a miss on him.

Many home buyers who seek loans get confused when they see a discrepancy in the loan amount calculations in different banks. The problem is even worse when the applicant has no savings of their own, and are thus unable to pay the remaining amount to fulfil the purchase. The reason behind all this confusion, is the “Loan to Value Ratio”.

What is LTV (Loan to Value) Ratio?

When you apply for a home loan, factors such as your credit score, income, assets, etc. play a role in the application’s rejection or approval. However, if it is approved, then LTV comes into effect. LTV is the ratio of the actual property value, and the value of the loan a bank is willing to offer. Most banks offer only about 85% of the property value. Although, some banks may go as high as 90%, or 95% in certain conditions. It is also worth noting that lenders often have their own technical evaluator to get an estimate of the property you are applying for, which is based on the market values they consider.

When you seek a loan that establishes a high LTV then it becomes a risky transaction for the bank, or the seller. Similarly, if the LTV is low for the loan amount you have applied for, then there is less risk on the lender’s side. Thus, if you have a better change at securing a loan with a low LTV.

LTV in Land Loans

Although land appreciates in value more than homes and apartments, banks generally tie them with low LTVs. This is because with lands the legal risks involved are a lot more, and they are also more likely to get caught in encroachment issues. Thus, if you seek a land loan you will be provided 80% to 85% of the value in most cases.

RBI Guidelines on LTV

The central bank of India has increased the maximum LTV for housing loans up to 90%. However, this means that you can’t get a loan value higher than 90% of the property value. You have to arrange the remaining 10 percent on your own to secure the property.

While understanding LTV is important, it is also important to consider additional costs. Many people overlook other expenses that are involved when you take a DHFL home loan, ICICI home loan, or any other bank’s loan. These include:

  • Insurance and Taxes: Home insurance is generally a separate expense when you apply for a home loan. Thus, you have to deal with it individually. However, some lenders offer home loan insurance, which can be an add-on product coupled with the actual loan itself. Apart from this, assorted taxes that are involved are also to be paid by you separately.
  • Stamp Duty and Registration Fees: Stamp duty is a significant expense that you have to take into consideration when you apply for a loan. it can be as high as 4% to 8% of the property value, which is why you must ensure you have enough saving for it, as it is also not covered in the loan.
  • Furnishing: Unless you have existing furniture, you will have to buy it for the new home. Plus, you might also have to spend money on interior designing, etc.

If you are applying for a home loan, make sure your credit score is high, and that you have informed yourself on the important aspects of the procedure. This will make everything easier, and simpler.