Understanding Loan to Value Ratio (LTV)

loan to value ratio

It was a sunny Sunday morning and Kuber was all in a relaxing mood. He was just about to start having his favorite breakfast meal when the doorbell rang. It was Aditya at the door.

KuberJi, I was just returning from my morning jog and thought to discuss something with you.” Aditya clearly conveyed his purpose for the visit.

Kuber was concentrating more on his breakfast, but then his etiquettes took over. “Oh, sure. We can discuss the things over the breakfast table.

Seeming a bit hesitant disturbing Kuber over his breakfast, Aditya said, “I think I should come some other time, maybe in the evening.

Oh, come on! I don’t cook that bad a breakfast.” Kuber quipped and the conversation started moving towards the desired course.

I hope you remember, we were discussing last week about a property I was considering to buy. I am finally buying that property in Gurugram for Rs. one crore. I also applied to ABC bank for a loan of Rs. 85 lakh to cover the cost and stamp duty charges. However, my bank says, I can only avail a loan upto Rs. 75 lakh. How do I convince my bank?” Aditya was clueless on why the bank was denying him a higher loan, even when his salary justified that amount.

Kuber was all ready now to educate Aditya, something he really enjoyed. “There is a concept called Loan to Value (LTV) ratio. It denotes how much a bank can lend against a property to a borrower. An85% LTV indicates that the buyer will be required to pay only 15% of the property value in the beginning and the rest can be financed through banks. RBI has prescribed different LTV ratios for different categories of individual housing loans.

So, is it that large loans come with lower LTV?” Aditya was in no mood to leave Kuber easy.

RBI has prescribed a loan to value ratio of up to 90% for home loans of Rs.30 lakh or less. For larger loans upto Rs. 75 lakh, LTV ratio can be upto 80%. For the loans above Rs. 75 lakh, LTV can be maximum of 75%. So, now you precisely know why the bank refused you a higher loan.” Kuber clarified all his doubts.

“But why such limits?” Aditya seemed interested to know more about Loan to Value Ratio now.

Banks are commercial entities and they need to manage their business risks. A lower loan to value ratio implies more upfront investment by the borrower into the property. It also protects the bank for the decreases in the market value of the property, just in case the borrower defaults and the bank has to resort to selling the property.

Aditya was happy even while he will now have to arrange for another Rs. 10 lakh for the transaction. A couple of minutes later, Kuber and Aditya were busy in treating their stomachs to some delicious breakfast.

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