A loan-to-value (LTV) ratio is the percentage of property value that a financial institution can sanction as a loan to a borrower. Accurate assessment of the LTV ratio is crucial for any lending institution to ensure they do not end up taking higher risks.
Borrowers can also check the LTV ratio easily by using an LTV calculator online. More details regarding this have been discussed below.
Why does the LTV ratio matter?
When an entity (individual or company) raises a request for a loan against property (LAP) for commercial real estate, the lenders prioritise the LTV. It is a metric used to adjust the approvable principal per the value of collateral.
Banks and NBFCs have devised this method to lower the risk of lending and simultaneously provide better opportunities to borrowers with sound creditworthiness.
Generally, mortgage lenders offer an LTV ratio of 80% of a property’s appraised value as a loan while requiring the borrower to come up with the rest as a down payment.
How to determine the LTV or loan-to-value ratio?
Here’s a quick formula to calculate any offer’s loan-to-value ratio:
LTV ratio = Amount borrowed/ purchase value or appraised value of a property (whichever is less)
Suppose a person owns an apartment valued at Rs.70 lakhs. Now, let’s assume that he wishes to take a loan against property from his preferred lender.
Conventionally, the lending institution will extend a loan amount of up to 80% of the property’s price. This means the potential borrower can get up to Rs.56 lakhs as an LAP. This is how lenders mitigate the risk involved in standard refinance and asset purchase transactions.
Before applying for a loan against property, it is better to assess the LTV ratio as it allows more precise financial planning. This can be completed in just a few basic steps.
All one needs to do is open their lender’s online LTV calculator and feed in the desired loan amount along with the real estate value. After that as soon as the ‘calculate’ button is clicked, the LTV appears as a percentage.
Are there any benefits for a loan against property?
Several advantages are associated with opting for an LAP. Here are the most noteworthy benefits:
Higher principal amounts
Banks and NBFCs are willing to disburse a large sum of money as a loan against property due to its secured advantage.
Low interest rates
Interest rates are also lower compared to unsecured loans as the lender has to deal with lesser risk.
Enhanced credit score
Including a mortgage loan in one’s credit profile followed by successful repayments month after month, boosts their creditworthiness.
EMIs can be modest for a loan against property if one opts for longer tenors. These smaller instalments are due to the distribution of the entire repayable amount over a maximum time of 30 years. It makes it very easy to manage the loan repayment.
Two major clauses pertain to mortgage loan borrowers as per the norms of the Indian Income Tax Act.
Firstly, Section 24(B) enables all salaried people to leverage their loan against property tax deductions. As per this regulation, when one utilises the LAP money to fund the purchase of a new residence, they are entitled to tax deductions of up to Rs.2 lakhs. However, this tax deduction is solely applicable to interest payments.
There’s another tax benefit, but it is related to the total expense of an individual. For instance, if someone has commercial expenses not related to their own capital appreciation, they may include the EMIs in their income/ loss statement.
Still, if there’s any doubt regarding a loan against property tax benefits, it is better to consult with one’s lender or a financial consultant.
At present, almost every lending institution offers a pre-approved loan to selected clientele based on their credit profile. These deals usually apply to products like loans against property, home loans, etc. Interested candidates can give their contact details on the official website of the lender to check their eligibility for these offers.
LAP applicants will not want to opt for the highest possible LTV ratio as that could mean higher interest rates. To ensure the best loan terms, one can access the lender’s LTV calculator anytime. Better clarity before finalising the loan deal will eventually result in a smoother repayment journey.
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