Deciphering Loan-to-Value Ratio in Property Financing

Loans against property have emerged as a very popular financing option in India today. Individuals who own property — commercial, residential or land — can pledge it as collateral and avail of a loan against it. Such a loan is referred to as a loan against property or simply a property loan. The term mortgage loan is also used for such loans in common parlance.

Loans against property offer many benefits. These low-interest rate loans are easy to repay, primarily because of the flexibility to choose one’s desired loan tenor based on one’s repayment capacity. Further, with the help of property loan tax benefits, borrowers can also save on taxes significantly throughout their loan tenor. Lastly, lenders do not place any restrictions regarding how one can use the funds availed of, which makes loans against property an ideal borrowing option if you are looking to fund your child’s wedding pay their college tuition fee or start a new business.

Loans against property are also one of the only few loan options that give borrowers access to funds as high as Rs.10 Crore or even higher, based on eligibility. However, before you know how much you are eligible for, it is important to understand the concept of loan-to-value ratio.

Loans are of two types: secured and unsecured. Secured loans are backed by collateral whereas unsecured loans are sanctioned entirely based on an individual’s overall credit profile. In the case of secured loans, the value of the collateral plays an important role in helping lenders assess the maximum loan amount that one is eligible for. In very simple words, the loan-to-value ratio refers to the percentage of the pledged collateral’s current market value that can be sanctioned as a loan. The LTV ratio is calculated using the following formula:

LTV Ratio = (Loan Amount/Current Market Value of the Collateral) × 100

Let us understand this with an example. Let’s assume Mr. A owns a property worth Rs.2 Crore. He decides to avail of a Rs.1 Crore loan against it. In this case, the LTV ratio is 50%.

For property loans, the LTV ratio can go as high as 75%. However, high LTV ratio loans increase the risk for the lenders for when the loan value is high, so are the chances of loan default. Therefore, to cover up for this high risk, lenders charge a high rate of interest on high LTV ratio loans against property. Individuals planning to avail themselves of a property loan must try and keep the LTV ratio as low as possible if they do not wish to come across as credit-hungry and want their lender to consider them for the most favourable loan against property terms and conditions.

Borrowers who do not know how to calculate the LTV ratio or are too lazy to do so can use the LTV calculator. This online tool is easy to use, freely available on the internet and one need not pay any fee to use it. Other than helping you calculate your LTV ratio, the LTV calculator will also tell you the loan amount that you are eligible to apply for and the EMI you will have to pay if you decide to apply for this loan value. The LTV calculator is a highly beneficial tool, so consider making it a part of your home loan planning.