What is Loan to Value Ratio?
Loan to Value Ratio (LTV) is a financial metric used by lenders to assess the risk of lending for property purchases. It represents the percentage of a property value that a lender is willing to finance. Understanding LTV is crucial for anyone planning to take a home loan in India.
Simple Definition:
LTV Ratio = (Loan Amount / Property Value) × 100
Example:
Property Value: Rs. 50,00,000
Loan Amount: Rs. 40,00,000
LTV Ratio = (40,00,000 / 50,00,000) × 100 = 80%
This means the bank is financing 80% of the property value, and the buyer must arrange 20% (Rs. 10,00,000) as down payment.
RBI Guidelines on LTV Ratio
The Reserve Bank of India (RBI) sets maximum LTV limits that banks must follow for home loans:
| Loan Amount | Maximum LTV | Minimum Down Payment |
|---|---|---|
| Up to Rs. 30 lakhs | 90% | 10% |
| Rs. 30-75 lakhs | 80% | 20% |
| Above Rs. 75 lakhs | 75% | 25% |
Note: These are maximum limits. Individual banks may set lower LTV ratios based on their risk assessment.
Why LTV Matters to Borrowers
1. Determines Down Payment
LTV directly impacts how much cash you need upfront:
| Property Value | LTV | Loan Amount | Down Payment Needed |
|---|---|---|---|
| Rs. 50,00,000 | 90% | Rs. 45,00,000 | Rs. 5,00,000 |
| Rs. 50,00,000 | 80% | Rs. 40,00,000 | Rs. 10,00,000 |
| Rs. 50,00,000 | 75% | Rs. 37,50,000 | Rs. 12,50,000 |
2. Affects Interest Rates
Some lenders offer better interest rates for lower LTV loans as they carry less risk. A 10-20 basis point difference is common.
3. Influences Loan Approval
Lower LTV applications are generally approved faster and with fewer conditions as they represent lower risk to lenders.
4. EMI Impact
Higher LTV means higher loan amount, resulting in higher EMI. This affects your monthly budget and other financial commitments.
LTV Calculation Components
What Banks Consider as Property Value:
For New Properties:
- Agreement value with builder
- Banks valuation (usually conservative)
- Circle rate/guideline value
- Lower of the above is typically used
For Resale Properties:
- Agreement value between buyer and seller
- Independent valuation by bank-empaneled valuer
- Circle rate
- Most banks use their valuation or circle rate, whichever is lower
For Bank Auction Properties:
- Reserve price set by auctioning bank
- Final winning bid amount
- Fresh valuation by financing bank
What Is Excluded from Property Value:
- Stamp duty and registration charges
- Processing fees
- Interior costs
- Brokerage
Types of LTV Ratios
1. Standard LTV
The basic ratio of loan amount to property value as discussed above.
2. Combined LTV (CLTV)
Used when there are multiple loans against the same property (e.g., home loan + top-up loan):
CLTV = (All Loans Against Property / Property Value) × 100
3. High LTV
Generally considered above 80%. These loans carry higher risk premium and may have stricter approval criteria.
Factors That Affect Your LTV
1. Credit Score
Excellent credit scores (750+) may qualify for higher LTV ratios at better rates.
2. Income Stability
Stable employment history and consistent income can support higher LTV applications.
3. Property Type
- Residential: Higher LTV allowed
- Commercial: Generally lower LTV (60-70%)
- Land: Lowest LTV (50-60%)
4. Property Location
Properties in prime locations with good appreciation potential may get higher LTV.
5. Property Age
Older properties may qualify for lower LTV due to depreciation concerns.
6. Builder Reputation
Properties from approved/reputed builders may get more favorable LTV treatment.
LTV for Different Loan Types
Home Purchase Loan:
- New Property: Up to 90% (for loans under Rs. 30 lakhs)
- Resale Property: Up to 85%
- Bank Auction Property: 75-85%
Home Construction Loan:
- Disbursed in stages based on construction progress
- LTV calculated on total project cost
- Generally 75-80%
Home Improvement/Renovation:
- LTV on renovation cost: 80-90%
- Overall property + renovation: Follow standard limits
Loan Against Property:
- Residential: 60-70%
- Commercial: 50-60%
How to Calculate Your Required Down Payment
Step-by-Step Process:
- Determine Property Value: Agreed price or bank valuation
- Know Applicable LTV: Based on loan amount slab
- Calculate Loan Amount: Property Value × LTV%
- Calculate Down Payment: Property Value – Loan Amount
- Add Registration Costs: Stamp duty + registration (6-8%)
- Add Other Costs: Processing fee, legal charges, etc.
Example Calculation:
Property Value: Rs. 60,00,000
Applicable LTV: 80% (loan above Rs. 30 lakhs)
Maximum Loan: Rs. 48,00,000
Down Payment: Rs. 12,00,000
Stamp Duty (6%): Rs. 3,60,000
Registration (1%): Rs. 60,000
Processing Fee (0.5%): Rs. 24,000
Total Upfront Requirement: Rs. 16,44,000
Strategies to Work with LTV Limits
If You Have Limited Down Payment:
- Look at Lower-Priced Properties: Higher LTV available for smaller loans
- Consider Bank Auction Properties: Lower purchase price means lower down payment
- Add Co-Applicant: Combined income may help negotiate better terms
- Explore PMAY Benefits: Interest subsidy effectively reduces your burden
- Negotiate with Seller: Some flexibility on payment terms possible
If You Can Make Higher Down Payment:
- Negotiate Lower Interest Rate: Lower LTV = Lower risk = Better rates
- Reduce Loan Tenure: Lower loan amount allows faster repayment
- Avoid PMI-Equivalent Costs: Some insurances required for high LTV loans
- Build Equity Faster: Higher ownership stake from day one
LTV and Bank Auction Properties
For bank auction property purchases, LTV considerations include:
Advantages:
- Lower purchase price means lower absolute down payment
- Property value for LTV based on lower auction price
- Banks familiar with auctioned properties
Considerations:
- Some banks apply conservative LTV (75-80%) for auction properties
- Tight timelines require pre-arranged financing
- Property condition may affect valuation
Example:
Market Value: Rs. 50,00,000
Auction Price: Rs. 40,00,000 (20% discount)
LTV at 80%: Rs. 32,00,000 loan
Down Payment: Rs. 8,00,000
Compare to regular purchase: Rs. 50,00,000 at 80% LTV = Rs. 40,00,000 loan, Rs. 10,00,000 down payment
Impact of LTV on Total Cost
Comparison Example:
Property: Rs. 50,00,000
Interest Rate: 8.5%
Tenure: 20 years
| LTV | Loan Amount | Down Payment | Monthly EMI | Total Interest |
|---|---|---|---|---|
| 90% | Rs. 45,00,000 | Rs. 5,00,000 | Rs. 39,052 | Rs. 48,72,456 |
| 80% | Rs. 40,00,000 | Rs. 10,00,000 | Rs. 34,713 | Rs. 43,31,072 |
| 75% | Rs. 37,50,000 | Rs. 12,50,000 | Rs. 32,544 | Rs. 40,60,380 |
Insight: Moving from 90% to 75% LTV saves Rs. 8,12,076 in interest over 20 years.
Common LTV-Related Mistakes
- Maximizing LTV Unnecessarily: Higher LTV when you can afford more down payment
- Ignoring Total Cost: Focusing only on down payment, not long-term interest
- Not Comparing Lenders: Different banks may offer different LTV for same property
- Overlooking Additional Costs: Registration, taxes not covered by LTV
- Assuming Market Value = Bank Value: Banks often value conservatively
Conclusion
Loan to Value Ratio is a fundamental concept that directly impacts your home buying experience. Understanding LTV helps you plan your down payment, choose appropriate properties within your budget, and potentially negotiate better loan terms.
For first-time buyers and those looking at bank auction properties, working within LTV limits while maximizing savings requires careful planning. Always calculate total costs including down payment, registration, and other charges before committing to a property purchase.
Remember, while higher LTV means lower immediate cash outlay, it also means higher loan amount, higher EMI, and more interest paid over the loan tenure. Balance your current cash availability with long-term financial prudence when deciding on LTV.