What is LTV in the case of LAP? How is it determined?

A loan against property or LAP can be an excellent alternative to a personal loan. It can help you access finances in the hour of need and meet your various financial requirements. And since LAPs are secured loans, you can get them at lower interest rates than unsecured modes of financing, such as credit cards and personal loans.

However, before you go out to apply for a loan against property, there are some terminologies that you need to understand. One such terminology is the Loan to Value ratio or LTV. In this article, we will tell you what is LTV in the case of LAP and how it is calculated. But first, let’s discuss what a loan against property is.

What is a loan against property?

A loan against property is a secured loan that the lender disburses after keeping a legally owned property of the borrower as security or collateral. It can be a piece of land, a self-occupied or rented house, or self-owned commercial premises.

It needs to be noted here that the borrower remains the rightful owner of the mortgaged property. It only remains as collateral with the lender until they have repaid the entire loan amount.

A loan against property can be a suitable alternative to unsecured personal loans since it has no end-use restriction. It means that it can be used for any purpose, ranging from tackling a medical emergency to paying for higher education to renovating a home.

The concept of Loan to Value ratio 

The concept of LTV or loan to value ratio is applicable on home loan and loan against property. It plays a crucial role in determining the total loan amount you can borrow from a lender as a home loan or LAP.

In the case of LAP, the loan to value ratio is the ratio of the maximum loan amount you can borrow against the current market value of the property you’re mortgaging. Generally, the loan-to-value ratio in LAP ranges between 40 and 75 percent of the mortgaged property’s market value as determined by the lender. However, some lenders even offer up to 90% financing to get an edge over their competitors.

The LTV tells you the maximum amount of financing that you can get on your property. Knowing this amount lets you decide the quantum of loan you want to borrow and then use a loan against the property EMI calculator to determine your monthly EMIs.

As per the Reserve Bank of India guidelines, lenders can finance up to 90% of the property’s value if the loan amount is less than Rs. 30 lakh. If the loan amount is more than Rs. 30 lakh, the maximum LTV allowed is 75%.

How to calculate the Loan to value ratio?

The loan to value ratio in LAP is calculated by dividing the loan amount by the determined value of your property and multiplying the result with 100.

For example, suppose you’ve applied for a loan against property by keeping your house as collateral. Now, after verifying the property and cross-checking the documents, the lender tells you that the market value of your house is Rs. 50 lakh, and you can borrow a maximum amount of Rs. 30 lakh against it. In such a case, the LTV on your LAP would be (30/50) x 100, i.e., 60%.

Below is the formula for calculating Loan To Value:

Loan To Value = (The principal loan amount that you’re borrowing / Current market value of your property) x 100

You can also use an online LTV calculator to know the LTV ratio of your loan against property. To use this calculator, you’re required to enter the loan amount that you’re borrowing, your property’s current market value, and then click on “Calculate LTV”. The loan to value ratio in your LAP will get displayed in front of you.

Also Read :- Things to Remember Before Taking a Loan Against Property

Factors that impact the Loan to Value ratio

Several factors can impact the LTV ratio of your LAP. It may increase or decrease depending on these factors. Below are the factors that can impact your LAP’s LTV ratio:

• The type of lender
  The loan to value ratio in LAP varies from one lender to another. While some lenders offer lower LTV ratios, others can offer higher LTV ratios for the same properties. Hence, it’s very crucial to know the LTV ratio while applying for a LAP with a lender.
  Generally, banks offer a lower LTV ratio as compared to non-banking financial corporations (NBFCs) such as Poonawalla Fincorp.
   
• The type of property
  The type of property also plays a crucial role in determining the LTV ratio that lenders offer. The LTV ratios are generally higher for residential properties than commercial properties. On average, you can expect the LTV ratio of a residential property to be around 10% higher than a commercial property of a similar value.
  Having said that, it’s important to note that specific industrial properties can also attract very high LTV ratios.
   
• Occupancy status
  The property's occupancy status that you’re planning to keep as collateral can also impact your LAP’s loan to value ratio. Occupied premises usually attract higher LTV ratios than unoccupied or vacant ones. And whether you or your tenant occupies the property also impacts your LTV ratio.
  If you want a lender to offer a maximum LTV ratio, you should mortgage a self-occupied property rather than a rented or vacant space.
   
• Age of the property
  The age of the property that you're mortgaging also plays a role in determining your LAP's LTV. It's because lenders consider older buildings unsafe or risky, and hence, they provide a lesser loan amount against them. Similarly, if your property is comparatively new and well-constructed, you can get a better deal from your lender regarding the LTV ratio.
   
• The credit score of the borrower
  Like every other loan, the borrower's credit score has a vital role in a loan against property. If you have a credit score of 750 or above, the lender will perceive you as a responsible borrower, and you may get a high loan amount. And the loan to value ratio of your LAP will automatically go up.

The importance of Loan to Value Ratio 

The loan to value ratio in LAP reflects the risk a lender is taking while lending a loan to the borrower. It compares the total loan amount with the market value of the mortgaged property. Hence, by opting for a lesser loan amount or lower LTV, you can increase your eligibility for availing of a loan against property. A lower LTV ratio is more suitable since it decreases its risk from a lender's perspective. However, from a buyer's point of view, a lender offering the highest LTV ratio is the best.

The final words

When you apply for a LAP, you must necessarily look at the LTV ratio that the lender is offering. Usually, it's better to opt for the lender offering the highest LTV ratio. However, by opting for a loan with a lower LTV ratio, you can get a better deal on interest rate from your lender.

With Poonawalla Fincorp, you can avail of a gamut of loans, including personal loans, home loans, and loans against properties. Browse through our website and choose the right financing option for yourself.