How to increase your loan value ratio
Loan to value (LTV) ratio is a number that compares the size of a loan to the value of the property against which the loan has been taken.
- Jun 1, 2017,
- Updated Jun 1, 2017 1:18 PM IST
Loan to value (LTV) ratio is a number that compares the size of a loan to the value of the property against which the loan has been taken. Lenders use this number to know how risky a loan is before approving any loans or mortgage insurance. Higher an LTV ratio more is the risk, because the asset is not worth enough to pay off the loan. This ratio is useful for different types of loans, including purchasing of a residential property or refinancing your current mortgage.
Though LTV is not the only factor considered for approving a loan, most of the lenders offer loans at the lowest possible interest rate when the ratio is either 80% or less. If the ratio goes up, the borrower may still secure a loan from the lender but at a higher interest rate, eventually increasing the total cost of the loan.
Always follow the advice of qualified professionals when you plan to increase the loan-to-value ratio. Your loan-to-value ratio will depend on factors like the type of lenders (public sector banks/private sector bank/financial institutes) and also on the financial profile of the borrowers. Make sure you do not default on your EMI. Clearing your existing loans will result in better CIBIL credit score. This, in turn, will help you in getting a better LTV ratio. However, banks and lenders always judge the consequence of increased LTV ratio before approving the loan and then other factors are considered to ensure the borrower would be able to repay the loan.
One must have a good financial track record to be eligible for a loan. High CIBIL credit score reflects how good you had been in servicing your earlier loans of any kind-- be it home loan, car loan or personal loan and even credit card due payments. High credit score indicates no default of EMI payment, and prepayment for foreclosing the loan will get you some additional points increasing your credit rating score. You should make sure to include your spouse's salary, your variable pay, rental income (if any) to establish your credit worthiness and your ability to repay the loan. This will help the lenders to mitigate risk and to increase your LTV ratio. The age of the borrower is also an important factor. Younger the borrower the more is the chance of getting better LTV.
Your LTV ratio will depend a lot on the kind of borrower you apply your loan from. Financial institutes like housing finance companies usually offer better LTV than any other banks. For finance companies this is the core stream of business while for banks this is one of the many vertical of business. If you wish to increase your LTV you should approach one of the financial institutes for your loan requirement. Banks usually consider the basic value of the property for financing your home loan, excluding registration charges, stamp duty or any other administrative charges. This brings down the LTV ratio considerably. Housing finance companies consider all these charges to arrive at the total value of the transaction and then sanction loan on this value. This increases the LTV ratio which in turn means that one needs to contribute lesser amount of capital.
Reserve Bank of India, in 2015, notified that LTV of up to 90% for home loans of Rs.30 lakh or less is now allowed. This will make home loans more affordable for a large number of urban homeowners. For loans above Rs.30 lakh to Rs.75 lakh, the LTV will be up to 80% and above Rs.75 lakh the ratio will be 75%. This ratios are little higher for HFCs which is to the advantage of the borrowers. It is worth mentioning here that the home loan interest charged by the HFCs is linked with BPLR (Benchmark Prime Lending Rate) which may not always work in borrowers' favour. However, there may be a higher cost associated with higher LTV ratio. Usually, the borrowers have to pay a premium for additional guarantee cover. For every 1% guarantee cover, the rate of lending will go up by 1.2 basis points, i.e., 0.012% which means more interest payout by the borrower. Though the percentage may look meagre but the total interest payout may be significant considering the high loan amount and higher tenure of repayment.
Sometimes, the homeowners miss out on simple things that can easily improve their LTV ratio. Maintaining and increasing the value of your property is the easiest way to improve your LTV ratio. Home improvements like adding an additional floor, upgrading the kitchen, etc. can increase the value of your property.
LTV is extremely important for new borrowers who is about to take his/her first loan. At this stage they may not have a lot of money to make the deposit. They should shop for any loans carefully by meticulously weighing pros and cons of the offer.
By, Amit Mittal - Co-founder & Director of eSilverbucks Consultants Private Limited
Loan to value (LTV) ratio is a number that compares the size of a loan to the value of the property against which the loan has been taken. Lenders use this number to know how risky a loan is before approving any loans or mortgage insurance. Higher an LTV ratio more is the risk, because the asset is not worth enough to pay off the loan. This ratio is useful for different types of loans, including purchasing of a residential property or refinancing your current mortgage.
Though LTV is not the only factor considered for approving a loan, most of the lenders offer loans at the lowest possible interest rate when the ratio is either 80% or less. If the ratio goes up, the borrower may still secure a loan from the lender but at a higher interest rate, eventually increasing the total cost of the loan.
Always follow the advice of qualified professionals when you plan to increase the loan-to-value ratio. Your loan-to-value ratio will depend on factors like the type of lenders (public sector banks/private sector bank/financial institutes) and also on the financial profile of the borrowers. Make sure you do not default on your EMI. Clearing your existing loans will result in better CIBIL credit score. This, in turn, will help you in getting a better LTV ratio. However, banks and lenders always judge the consequence of increased LTV ratio before approving the loan and then other factors are considered to ensure the borrower would be able to repay the loan.
One must have a good financial track record to be eligible for a loan. High CIBIL credit score reflects how good you had been in servicing your earlier loans of any kind-- be it home loan, car loan or personal loan and even credit card due payments. High credit score indicates no default of EMI payment, and prepayment for foreclosing the loan will get you some additional points increasing your credit rating score. You should make sure to include your spouse's salary, your variable pay, rental income (if any) to establish your credit worthiness and your ability to repay the loan. This will help the lenders to mitigate risk and to increase your LTV ratio. The age of the borrower is also an important factor. Younger the borrower the more is the chance of getting better LTV.
Your LTV ratio will depend a lot on the kind of borrower you apply your loan from. Financial institutes like housing finance companies usually offer better LTV than any other banks. For finance companies this is the core stream of business while for banks this is one of the many vertical of business. If you wish to increase your LTV you should approach one of the financial institutes for your loan requirement. Banks usually consider the basic value of the property for financing your home loan, excluding registration charges, stamp duty or any other administrative charges. This brings down the LTV ratio considerably. Housing finance companies consider all these charges to arrive at the total value of the transaction and then sanction loan on this value. This increases the LTV ratio which in turn means that one needs to contribute lesser amount of capital.
Reserve Bank of India, in 2015, notified that LTV of up to 90% for home loans of Rs.30 lakh or less is now allowed. This will make home loans more affordable for a large number of urban homeowners. For loans above Rs.30 lakh to Rs.75 lakh, the LTV will be up to 80% and above Rs.75 lakh the ratio will be 75%. This ratios are little higher for HFCs which is to the advantage of the borrowers. It is worth mentioning here that the home loan interest charged by the HFCs is linked with BPLR (Benchmark Prime Lending Rate) which may not always work in borrowers' favour. However, there may be a higher cost associated with higher LTV ratio. Usually, the borrowers have to pay a premium for additional guarantee cover. For every 1% guarantee cover, the rate of lending will go up by 1.2 basis points, i.e., 0.012% which means more interest payout by the borrower. Though the percentage may look meagre but the total interest payout may be significant considering the high loan amount and higher tenure of repayment.
Sometimes, the homeowners miss out on simple things that can easily improve their LTV ratio. Maintaining and increasing the value of your property is the easiest way to improve your LTV ratio. Home improvements like adding an additional floor, upgrading the kitchen, etc. can increase the value of your property.
LTV is extremely important for new borrowers who is about to take his/her first loan. At this stage they may not have a lot of money to make the deposit. They should shop for any loans carefully by meticulously weighing pros and cons of the offer.
By, Amit Mittal - Co-founder & Director of eSilverbucks Consultants Private Limited