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What Is The Loan-To-Value (LTV) Ratio?

It is the amount of money that will be paid by the bank to finance your home loan. This ratio is calculated by dividing the market value of the property by the loan amount given by the housing finance company or bank. For instance, if the value of the house is `1crore and the bank finances `80 lakh, the LTV is 80:20. The rest `20 lakh, better known as margin money, has to be funded by borrower.

How is it decided?

Home loan financers, both banks and housing finance companies, disburse loans based on the LTV. Guidelines of the LTV are given by the Reserve Bank of India (RBI) for banks and National Housing Bank (NHB) for housing finance firms. The LTV is also a function of the number of dependants, borrower's income, age and his income tax returns, for the past three years, any existing loan and so on. The bank decides on the loan amount, based on the instalment-to-salary ratio as well. That is, the equated monthly instalment (EMI) should not exceed 40-50 per cent of the take-home salary. If this number is higher, the bank will give a lower loan. Sometimes, if property prices are too high in a particular area, banks prefer to reduce the LTV. This insulates them from a sudden price fall and reduces their risk.

Is it fixed across all lenders?

Earlier, some banks disbursed loan amounts up to almost 95 per cent of the total property value. However, a recent RBI directive mandates all banks to maintain their LTV at 80:20 for loans over 20 lakh. For loans below `20 lakh, banks are allowed to maintain a higher LTV ratio of 90:10. This is because loans below it come under priority sector lending. Housing finance companies like LIC Housing Finance, Housing Development Finance Corporation and others are not covered by RBI regulations. But they also follow guidelines similar to the apex bank. At present, they also follow the cap of 80:20 for loans above `20 lakh and at 90:10 for those less than `20 lakh.

How to enhance the LTV?

Although banks and HFCs are bound by RBI and NHB guidelines, borrowers can find ways to get the loan amount enhanced. You can improve your eligibility by applying for a joint loan with a spouse, whose income can be clubbed with yours or even by showing more investments. They will also look for indications of whether your future income is likely to improve as compared to the monthly instalments you are likely to pay on the loan.

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