What is Loan to Value ratio (LTV) in a Loan Against Property?

Tanya and Rupa are discussing Tanya’s plan to expand her business. Since Rupa is financial advisor, she explains the benefits of Loan Against Property to a still hesitant Tanya.

 

Tanya- I don’t know, Rupa, Loan Against Property is too risky, isn’t it? This ancestral property is all I have as my security!

 

Rupa- Tanya, that’s a myth. In fact, understand Loan Against Property meaning first. It is a secured loan option. Plus, it comes with multiple benefits for young entrepreneurs like you. 

 

Tanya- Like what? I mean, I need funding for my business, and at this point, I don’t want more overheads.

 

Rupa- Okay, let me start with a fun fact to cheer you up. Did you know Loan Against Property is relatively cheaper than a personal loan? There are low interest rates, and the repayment tenure is high!

 

Tanya- Oh, tell me more!

 

Also read: What is Loan Against Property? Features, Eligibility, Documents, and more

 

Rupa- Well, if you put up a property as collateral, you don’t have to vacate the place. You can continue using the property while paying the EMI on time.

 

Tanya- Okay, so how is Loan Against Property’s funding calculated?

 

Rupa- With the help of Loan to Value ratio. It’s also called LTV ratio.

 

Tanya- What is Loan to Value in Loan Against Property?

 

Does starting or expanding your own business leave you with questions like Tanya?! Well, don’t worry! We are here to help you unlock maximum value for your property with our article on Loan to Value.

 

Read on.

 

What is Loan to Value (LTV)?

In Loan Against Property, the Loan to Value Ratio (LTV) means ‘How much of the property’s market price is being paid by your lender?’. Loan to Value meaning, therefore, is your property’s market value as assessed by the lender.

 

Loan to Value is the maximum amount offered by the lender. It is based on the current market value. It considers liquidity of the asset offered as collateral. In other words, LTV is the ratio of the property’s value and the loan sanction amount. This is one of the most important metrics a lender considers while sanctioning the loan. It is to evaluate the risk associated with sanctioning the loan.

 

Loan-to-value ratio in a LAP is between 40%-75% of the mortgaged property’s market value. However many lenders, like Godrej Capital, offer 85% LTV. This enables you to choose the loan amount you need and calculate your monthly EMIs. 

You can calculate monthly EMIs using a loan against property EMI calculator.

 

Also Read: Glossary: A Guide to Most Used Terms in Loan Against Property

 

How is Loan to Value calculated?

LTV Ratio determines loan amount divided by property’s value. It is represented as a percentage. LTV Ratio impacts the Loan Against Property Interest Rates majorly.

 

The Loan to Value formula for calculating the LTV ratio is-

 

LTV % = (Principal Amount / Market Value of the Property) * 100

 

Loan To Value Example 

Ramu urgently needs INR 30 lakh to buy office equipment. He mortgages his property for the loan amount. The lender will check the property value and Ramu’s eligibility to receive the loan. If Ramu’s property’s market value is INR 40 Lakh, the lender may decide to lend the required amount of INR 30 lakh. In this case, LTV will be calculated as- LTV % = (30 Lakhs / 40 lakhs) * 100.

 

Why is Loan To Value important?

Importance of LTV is high.  This is because lenders look at the LTV ratio to assess how much risk they are willing to assume. Lenders believe that there is a greater risk of defaulting when borrowers request a loan amount that is close to the assessed value. This is due to the property having relatively little built-up equity. As a result, in the event of a foreclosure, the lender might have a hard time selling the house. This is in an instance they want to recover enough money to pay off the remaining debt and turn a profit.

 

💡Pro-Tip: Always mortgage a property that has a good market value. Keep the property papers free of issues like unclear property titles, ownership problems, etc.

 

Which is better - Higher or Lower Loan To Value?

From the borrower’s perspective, a high LTV is lucrative as he/she receives maximum funding. Borrowers can acquire the desired amount to meet their requirements. In this case, it’s a new business venture or expansion plan. Also, a higher LTV allows the borrower to negotiate for a lesser rate of interest and longer loan tenures.

 

Thus, at the time of choosing your lender, ensure that you negotiate and opt for a higher LTV. We also recommend due diligence to take into account other factors, such as post-sale service, flexible repayment plans, etc., while making the choice.

  

Conclusion
So, what do you think is the most profitable catch as a borrower? Well, we leave the decision up to you! Loan Against Property product has benefitted many businesses. The quick funding, flexible repayment tenures, lower interest rates, and longer tenures make it an attractive option for business owners.

 

When deciding to opt for Loan Against Property, make sure to know about the nitty-gritty of loan Against property and meet the Loan Against Property eligibility criteria. Understand the different types of loan available. Read all the terms and conditions carefully and check for any hidden charges.

 

Apply for Loan Against Property today!

 

For more information on loan products, visit our Knowledge Center

 

Also Read: Mistakes to Avoid When Applying for a Loan Against Property

 

Related FAQs

Q.1. What is Loan to Value offered at Godrej Capital?

For Loan Against Property, Godrej Capital offers Loan to Value up to 85%. 

Q.2. What is Loan to Value for my property worth INR 1 crore?

Lenders typically offer Loan to Value ratio of 40-85%. So, if you lender offers LTV of 75% and your property’s market value is INR 1 crore, your maximum loan amount eligibility will be INR 75 lakh.

Q.3. What is Loan Against Property interest rate?

Loan Against Property interest rate at Godrej Capital starts from 9.75% per annum.

Q.4. What factors influence the LTV ratio for a loan against property?

Factors include the type and location of the property, the borrower's credit history, income, and existing liabilities. The lender's policy and the prevailing market conditions also play significant roles.

Q.5. Can the LTV ratio vary for different types of properties?

Yes, the LTV ratio can vary depending on the type of property. Residential properties generally have a higher LTV ratio compared to commercial properties.

 

Disclaimer- The names used in this article are fictitious and are used for representational purposes only.

The contents of this article is for information purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision and amendment and may change materially. 

The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its affiliates to any requirements. Godrej Capital or its affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.