When you are applying for a home loan, lenders don’t just look at your credit score, income, work experience, etc. One important metric that lenders use to evaluate your eligibility for the loan is loan to value (LTV) ratio.  

It plays a vital role in deciding your loan amount, interest rate and even whether your loan application gets approved. It tells banks how much risk they are taking on your loan. 

A loan to value ratio is a simple percentage that compares what you are borrowing against the worth of the asset pledged by you as collateral. The amount that any lender will sanction for the loan will depend on this ratio. The borrower must arrange for the remaining amount in the form of a downpayment.  

Higher the LTV percentage, greater is the risk for the lender. Readers should note that the value of the asset is determined based on the lender's appraisal and not its purchase price. 

LTV Ratio = (Loan Amount ÷ Property Value) × 100 

For example, if you are borrowing ₹25 lakh as a loan against your property which is worth ₹50 lakh, your LTV is 50%. However, if you want to borrow ₹35 lakh against the same property, the LTV increases to 70%. 

That 20% difference can change everything - interest rates offered by the lender, chances of getting loan approval, insurance requirements, etc. - a lot of things are dependent on this single ratio. 

Common Uses of LTV in Lending 

The LTV ratio plays an important role for multiple lending products like: 

• Home Loans: Banks in India typically cap home loan LTV at 75-90% (based on RBI’s guidelines) of the property’s value depending on the loan amount.  
• Loan Against Property (LAP): The LTV ratio for this loan is usually up to 70% of the market value of the property. However, like home loans, the exact percentage depends on the type of property, borrower’s credit profile and lender’s credit risk policies. 
• Auto Loans: The LTV ratio for car loans can usually go up to 100% for new cars and up to 80% for used cars. The final ratio depends on the lender’s valuation of the vehicle, the applicant’s credit profile, etc.  
• Gold Loans: The LTV ratio for gold loans is determined by lenders based on the RBI’s guidelines. 

LTV is not applicable for unsecured loans like personal loans since there is no collateral. But for any secured lending, this ratio drives the entire approval process. 

Impact on Mortgage and Loan Approval 

The LTV ratio plays a significant role in the lender’s decision to approve your loan application. Even if the borrower fulfils the other eligibility requirements like credit score, income, etc., the lender may not grant loan approval easily if the LTV is higher than usual. To get around this problem, you can opt for a higher downpayment amount for your loan and reduce your LTV ratio. 

Risk Assessment for Lenders 

From a bank's perspective, LTV answers one question: If you stop paying the loan EMIs, can the bank recover its money?  

For example, suppose a bank sanctioned a loan of ₹35 lakh on a ₹50 lakh property with LTV ratio of 70%. Even if the property’s value drops by 20%, they can sell it for ₹40 Lakh and recover the loan in case you default on your EMIs. However, if the LTV is higher, there is a chance that the lender may lose money even after selling your property. 

Influence on Interest Rates and Terms 

If you opt for a higher downpayment, thereby reducing your LTV ratio, it will improve your chances of availing of the loan at lower interest rates. This would also lead to lower EMIs and reduce your overall borrowing costs.  

You can use the EMI Calculator from Finnable to know how the different loan amounts, depending on the downpayment, can affect your monthly payments. 

Calculating LTV for Home Loans 

Scenario 1: First-time buyer 

Property value: ₹80,00,000 

Down payment: ₹16,00,000 (20%) 

Loan amount: ₹64,00,000 

LTV = 64,00,000 ÷ 80,00,000 × 100 = 80% 

This falls within RBI's 80% cap for loans between ₹30-75 Lakh. In this case the lender is likely to approve your loan application. 

Scenario 2: Premium property buyer 

Property value: ₹1,50,00,000 

Down payment: ₹30,00,000 (20%) 

Loan amount: ₹1,20,00,000 

LTV = 1,20,00,000 ÷ 1,50,00,000 × 100 = 80% 

In this scenario, the problem is that RBI caps LTV at 75% for loans above ₹75 Lakh. Hence, the maximum loan amount that lender can sanction is ₹1,12,50,000. The borrower needs to arrange an additional ₹7.5 Lakh as down payment for the loan. 

Below 60% LTV: Usually very safe for the lender. You are more likely to get the best possible interest rates for your loan in such cases, provided you fulfil the other eligibility conditions.  

60-75% LTV: Comfortable zone. The lender may offer standard interest rates in such cases based on the borrower fulfilling the other conditions.  

75-80% LTV: The lender may levy slightly higher interest rates for such loans, and you may have to face slightly stricter terms and conditions. 

80-90% LTV: This falls under the higher risk category. Therefore, the lender may have a more stringent eligibility criteria and fix a higher interest rate for such loans.  

Above 90% LTV: Difficult to obtain. Very few lenders offer this. Highest rates and strictest terms if approved. 

Increasing Down Payment 

This approach helps you save time and increase your chances for loan approval. For example, if you increase the down payment for your loan from 10% to 20%, your LTV ratio will drop from 90% to 80%. That 10% difference can increase your chances of getting your loan sanctioned.  

Paying Down Existing Debt 

If you already have a loan, your LTV may change over time. This is because every EMI payment reduces the principal amount for your loan. Along with that, if the price of your pledged property rises, both these factors can help improve your LTV. 

Example: The lender had given you a loan of ₹40 lakh on property worth ₹50 lakh property (80% LTV). After 5 years, the outstanding principal amount for the loan is ₹32 Lakh. And now the property is worth ₹60 Lakh. New LTV: 53%.