Most potential homebuyers would finally fund their purchase with certain housing finance. Apart from offering financial support, availing a loan also has numerous advantages, for instance tax exemptions, savings kept intact, and better credit scores. But, financial institutions can fundamentally up to 90% of the property’s cost, and the borrower must pay the enduring amount as a down payment. The percentage of the home’s price that the lending institution funds is termed as its LTV popularly called as Loan to Value ratio along with the loan amount a loan seeker may carry off is called eligibility.
Such a planning is done to apply for a housing loan and must thoroughly comprehended what an LTV Ratio for Home Loan is and how it influences their eligibility.
What is the LTV Ratio?
LTV, or known as the Loan-to-Value ratio, is the ratio of the loan amount an applicant is entitled to borrow against the desired property’s total market value. The formula is understood as:
LTV Ratio for Home Loan = Borrowed amount/ Value of the Property X 100
Assume purchasing a property worth 1 crore as well as the financial institution offering 80 lakh, the LTV is 75%.
Role of LTV Ratio in Determining Eligibility
Experts advise utilizing a Home Loan Eligibility Calculator, which is an online tool that essentially calculates the correct loan amount. It constitutes the income of the applicant, financial obligations, property price, down payment, as well as other parameters to propose the amount of eligible home loan amount.
LTV Ratio for Home Loan
The RBI has set various LTV limits as well as the slabs for Home Loans based on the cost of a home. These include as enlisted:
- LTV of up to 90% for homes costing below ₹ 30 lakh
- LTV of up to 80% for homes costing between ₹ 30 lakhs and ₹ 75 Lakh
- LTV of up to 75% for homes costing above ₹ 75 Lakh
Pros and Cons of a High LTV Ratio
An increased LTV ratio specifically for a Home Loan offers the benefits of a greater loan amount, including the borrower to spend a minimum from their pockets. Nevertheless, to opt for a greater LTV has some cons as well. When an applicant gets an increased LTV ratio, the major benefit is that the needed down payment lowers predominantly. Nonetheless, the EMI amount escalates due to the larger loan amount
What is the Ideal LTV Ratio?
Ensure to check Home Loan eligibility and LTV ratio, doing a certain cost-benefit analysis established on the borrower’s financial circumstances along with checking up on the home loan documents required is crucial. Recollect the increased loan eligibility, the reduction the down payment needed, and vice versa. A greater loan amount would essentially mean an enlarged loan tenure or greater EMIs, whereas a smaller loan will eventually make EMI repayment smaller.
The rate of interest for home loans are also critical in borrowing a loan with the suitable LTV ratio. In a case when interest rates are higher, it makes sense to borrow less by ensuring a greater down payment. If the borrower has funds to make an increased down payment, they must opt for a reduced LTV ratio to save capital on interest, reduction on the EMI amount, along with shortening the tenure of a loan. Nevertheless, if the available funds are critically limited, opt for a greater LTV ratio to borrow an increased loan.
One would also choose an enlarged loan amount and an increased LTV based on the current requirements. One would always prepay the loan amount later if a person has extra money. There are particularly no pre-payment charges for a home loan availed by a person. Nonetheless, it is advised that one check the prepayment terms and conditions with the reputable financial institution prior to applying for a Home Loan.
