Thread by @FinsenseG

Thread: Loan To Value Ratio

If you are a home buyer and plan to take a housing loan to finance your purchase, or if you are planning to invest in a housing finance company, this will add more to your knowledge base.

Loan-To-Value or LTV Ratio is the proportion of the home value that can be financed by Banks/NBFC's for your home purchase. So if the LTV ratio of a bank is 80%, that means the will lend you Rs. 80 for every Rs. 100 worth of home you are planning to buy.

Well, If the bank is going to lend only 80%, where is the remaining 20% going to come from? Your Pockets. Yes, Its called Down Payment.

Why is this ratio important for Banks/NBFC's? Well, It defines the risk that bank takes.

Lower LTV ratio would mean less risk for banks and vice versa.
If the buyer is ready to make a huge down payment and thereby improve the LTV ratio for the bank, The bank may charge him lower interest rate as the perceived risk for the bank is lower.

However, If the buyer is into the maximum permissible LTV ratio slab, then the bank may charge him a higher rate of interest to cover the risk.

In any case, Banks have to ensure that they try to achieve lowest possible LTV ratio while underwriting these loans. This gives them an extra cushion in case the value of property falls due to any reason.

Also a bank may accept a higher LTV if they feel that borrower has strong credit profile. Eg: A borrower might have high income, lower debt, or other factors like a large investment portfolio which again acts as a cushion.

Who decides the maximum permissible LTV ratio??

Reserve Bank of India!

Here are the slabs for LTV Ratio:

Here is a snapshot of LTV disclosure from Annual Report of LIC Housing Finance Limited:

Conclusion:
1) Higher LTV Ratio is risky for the banks, They may higher interest in such scenario.
2) Lower LTV Ratio is good for the banks, If this happens in your case, feel free to bargain for low interest rate on your home loan.

by @RJGyanchandani

#homeloan #nbfc #banks