When it comes to loans and mortgages, there are a lot of technical terms that most people are unaware of. But if you are planning on taking out a loan against property, it’s important to be familiar with some of these terms – especially the term loan to value ratio as it will help you determine how much money you will need to invest out of your savings.
What is the loan-to-value ratio?
Loan-to-value or loan-to-cost ratio is a pretty simple term to understand. It gives you, the borrower, an idea of the maximum LAP loan amount you can borrow against the appraised value of the property you are keeping as collateral. This ratio is always expressed as a percentage and it is used by lenders as a way to assess the risk when issuing a high-amount loan.
In layman’s terms, in case the borrower cannot repay the debt at any point of time, a claim of the asset is given to the lender.
There are multiple factors that determine the amount of the Loan against property that can be sanctioned such as value of the property, whether the borrower is a salaried employee or self-employed, credit score of the borrower, location, etc. To determine eligibility, you can make use of a loan against property calculator.
Calculation of the LTV ratio of LAP loan:
The loan-to-value ratio is calculated by dividing the loan amount by appraised value of the property multiplied by 100.
For example, a borrower requires a loan against property of INR 90 lakhs. The lender, after cross checking all requirements and necessary documents, confirms that the loan amount to be sanctioned will be INR 75 lakhs. Then the loan-to-value ratio will be as follows:
LTV = (75/90) x 100 = 83%
The LTV as well as the LAP loan amount is also determined depending on the condition of the property. If the property is older, the value will probably not increase over time which attracts lower loan amounts.
From the lender’s point of view, a lower loan-to-value ratio is appropriate as it requires the borrower to pay more of their own funds upfront, which implies a higher level of commitment from the borrower. However, in these situations, the lenders will quote higher interest rates so as to minimize the risk of a high LTV. That means, the loan-to-value ratio is directly proportional to the interest rate. Lenders also have to take into account the maturity of the property. Older properties tend to depreciate in value overtime which could become a burden on the lenders.
From the borrower’s point of view, a higher loan-to-value ratio is more cost-effective as it allows the borrower to negotiate not only the tenure of the loan against property but also a lesser interest rate.
From either perspective, the loan-to-value ratio is an important aspect of the loan. To understand whether you are eligible for an LAP loan, you can make use of the loan against property calculator, available on EFL.
EFL provides a loan against property with a maximum loan amount of Rs. 3cr, repayment up to 84 months, and a loan-to-value ratio of up to 70% of the property value.
EFL also allows borrowers to keep industrial property as collateral.