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How to Calculate the Loan to Value Ratio?

· Loan to Value,Finance

The LTV or loan to value ratio denotes the loan amount that a borrower can avail against the value of his/her asset while opting for a secured advance.

Based on this factor, the lending institution determines the amount that can be sanctioned to a borrower. Potential borrowers can also utilise a loan to value calculator or calculate manually to find a suitable lender offering better LTV.

How to calculate loan-to-value ratio?

The LTV calculation formula is given by:

LTV = (sanctioned finance / appraised value of property) x 100%

For instance, suppose an individual avails Rs.5 lakh as a loan against a property whose market value is pegged at Rs.8 lakh. Here, the LTV is pegged at 62.5%. Besides property value, this percentage also depends on factors like the borrowers’ CIBIL score, debt-to-income ratio and property dimensions. The repayment structure of loan against property also depends on LTV ratio which is supported by a borrower’s income stability.

What is the purpose of loan-to-value ratio?

Ahigh LTV ratio is considered as a risk factor from a lender’s perspective. Many loan applications are rejected for this reason or a higher interest rate is levied by financial institutions.

Hence, to avail a loan against property in India, individuals must find lenders who offer viable LTV of around 80%. This would aid in bringing down the EMI outgo significantly and allow borrowers to leverage the maximum equity lying in their assets.

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