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 LTV
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 LTV 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 LTV:
LTV = (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.
Factors that impact the LTV 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 importance of LTV
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.
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