If you’re in the process of deciding which Home Loan to apply for, it’s quite likely that you’ve come across the term ‘loan to value ratio’. To decide between the various types of Home Loans you can apply for, you need to understand this concept fully.
In this article, we help you understand what loan to value ratio for Home Loans actually means, how to calculate loan to value ratio, and what effect this is going to have on your quest for a Home Loan. You can also save yourself a lot of time and trouble by applying for an online Home Loan with Bajaj Finserv. You’ll incur a processing fee of only 0.8%!
Defining Loan to Value Ratio
Loan to value ratio (LTV ratio) is the comparison between the value of the loan you’re taking out and the value of the property that you intend to purchase with the loan.
How Does It Affect You?
It’s a simple calculation, but it can have a profound effect on your financial plans. It can affect the total amount that the bank lends you, and the monthly EMIs that you will have to pay. A high LTV ratio is considered to be a higher risk to the bank because the possibility of defaulting is higher. Banks usually have an LTV ratio can of 80%.
What this means for you is that you’ll have to produce the rest of the funds for the property out of your own pocket, which might prove to be a difficult task. If the value of the property in question is above 10 lakhs, the banks don’t consider stamp duty, registration, and other related documentation charges as part of the value of the property.
These overheads are usually a sizable chunk and make up around 15% of the property’s cost. However, there is good news for people who want to purchase property that has a value of up to 10 lakhs. The RBI recently passed a mandate because of which banks must now consider the overhead charges of stamp duty and other such documentation as part of the value of the property, as long as the value doesn’t exceed 10 lakhs.
The purpose of this move was mainly to empower economically weaker sections and reduce the financial burden on them.
How is It Calculated?
The calculation for LTV ratio is fairly simple. Here’s the loan to value formula used to arrive at the figure:
Loan to Value Ratio = Value of Loan/Value of Property
To make this simpler to understand, let’s take a look at a loan to value calculation example:
Suppose you want to buy a property that is valued at Rs 60,00,000, when you approach the bank for a loan of Rs 54,00,000, they will take the two values and apply the formula to them.
LTV Ratio = 5400000/6000000
This gives them a LTV Ratio of 90%. Because their cap is set at 80%, they will only approve a loan of Rs 48,00,000 on this particular property. Note that the value of the property (Rs 60,00,000) doesn’t include all the overhead registration and documentation costs. This means that you’ll have to procure the remaining funds (Rs 12,00,000) by yourself.
If you’re thinking about taking out a Home Loan, be sure to check out the ones offered by Bajaj Finserv.
Now that you know what loan to value ratio is, you’ll be able to make a better decision on the Home Loan you’re planning on taking out!