LTV

The Loan to Value Ratio denotes the percentage of loan that can be given to the buyer based on the loan amount and the value of the property that he proposes to buy. There are various steps involved after which the financial institution or the bank arrives at this value.

Suppose the collateral value of the property is 80000 INR and the increased or appraised value is 100000 INR, then the loan to value ratio is arrived at by dividing the former by the latter. So the ratio comes up to 80% in this case.

If the LTV comes to a value lesser than 100%, it signifies that the amount of loan is lesser than the actual value of the property. When the loan amount is low, it increases the chance of approval and it reduces the risk for the borrower.

If the LTV that is arrived at exceeds 100%, it signifies that the loan amount is greater than the actual value of the property. In this case, the borrower is at a high risk because his loans are more and at the time of selling off the property, the borrower has to pool in extra cash to close the collateral before zeroing on the deal.

When the LTV is more than 80%, it signifies that this loan cannot be sold off in any other auxiliary market. Most lenders don’t prefer this because they need to maintain this as a portfolio loan.

The interest rates charged on the loan depends on two main factors – one if the LTV is arrived at after the above calculation and the other is the risk factor of the lender. Some lenders also make the borrowers pay some mortgage insurance for the safety of the lenders in the event of borrower defaulting on the payments.

During the tenure of 30 years of a home loan, banks try to make more money out of this deal by selling off the loan at profits to reputed financial establishments after cleverly repacking the existing loans. Buyers must do proper research before taking home loans.