LTV (Loan to Value) ratio is a ratio of amount of loan to the total asset value. It tells about the amount of loan one could be eligible to in terms of the property value.
For example, Sampat Lal wants to avail a home loan. The value of the property is Rs 20,00,000 and the lender is giving him a loan of Rs 14,00,000. Hence, the LTV ratio is 70%. This ratio is a commonly used by banks and financial institutions for home loans and mortgages.
LTV Ratio = Amount of loan/Total asset value
It helps in determining the risk factor of a loan. The higher LTV ratio is, the riskier the loan is for the finance institution. On the basis of credit worthiness of the borrower, an appropriate LTV ratio is based. For example, if a person has an excellent credit record the bank can raise the LTV ratio. On the other hand, if a borrower is deemed to be high risk a lower LTV ratio is preferred.
CLTV Ratio – Combined Loan to Value Ratio
CLTV Ratio takes into account all the loans related to the property to the total value of the property. This has an advantage as the aggregate value gives a clearer picture and helps in effective risk assessment as well.
|Value of Home Loan||LTV Ratio|
|Up to INR 30 lakhs||90%|
|INR 30 lakhs – INR 75 lakhs||80%|
|INR 75 lakhs and above||75%|
The Reserve Bank of India is the regulating body that advises policy on LTV rations to lenders. In 2015, the RBI allowed lenders to increase LTV ratio up till 90% on home loans valued up to thirty lakh rupees. Prior to that, lenders could only provision for a LTV ratio of 90% for home loans up to twenty lakh rupees. Furthermore, if the loan amount is up till seventy-five lakh rupees LTV ratio of 80% needs to be maintained. If the loan value crosses this mark, the LTV ratio cannot be more than 75%.
Despite its advantages and effectiveness, LTV ratio cannot be a deciding factor regarding mortgages. But it is a one of the crucial tools used by lenders in determining how much loan would an eligible borrower get. It can also have an impact on interest charged by the lender. A higher LTV ratio might lead to a higher interest rate as well.