What Is A Loan-to-Value Calculator? What Are Its Uses?

As loans against property are becoming more and more prevalent, lenders have introduced measures to make them even more accessible and convenient. The loan against property market in India is expected to grow at a CAGR of over 14% in terms of value, to touch USD 857.87 billion by FY2026. 

The popularity of loan against property (LAP) as a financial instrument is attributable to the easy online application process, quick approval, and balance transfer facility. One can easily check their eligibility and apply for a LAP with a few clicks from the comfort of their home. Another useful tool that finance companies offer is a loan-to-value calculator, also known as an LTV calculator.

What is a loan-to-value calculator?

As the name suggests, an LTV calculator helps a borrower calculate the maximum loan-to-value ratio on a loan against property. The loan-to-value ratio represents the loan amount compared to the value of the property to be pledged as collateral. The ratio is expressed as a percentage, and its calculated according to the current fair market value of the property to be mortgaged with the lender. You can find an LTV calculator online on the websites of top lenders. Use these calculators to ascertain the amount you can borrow from a particular financial institution before applying for a LAP.

The loan-to-value ratio is a criterion that financial institutions take into account when they determine the level of risk attached with approving a loan against property. Lenders consider a loan with a high loan-to-value ratio to be riskier. Thus, LTV is one of the most important aspects of a loan against property. The loan-to-value for LAPs generally falls in the range of 40% to 75% of a property’s fair market value, depending on various factors.

How does a loan-to-value calculator work?

An LTV calculator uses a simple formula.

LTV ratio = principal amount / market value of the property

Let’s look at an example to understand this better. If you apply for a loan amounting to Rs.60 lakh against a residential property valued at Rs.1 crore, the loan-to-value ratio will be as follows: 

LTV percentage= (Rs. 60,00,000 / Rs. 1,00,00,000) * 100 = 60%

What are the uses of a loan-to-value calculator?

When applying for a loan against property, you naturally want the loan to be sanctioned at the most favourable terms. Lenders consider the loan-to-value ratio while determining the terms of your loan. It is useful for a borrower to calculate their loan-to-value ratio, as it determines several aspects of your loan, including:

Approval for loan

The LTV calculator is used to determine whether an application should be approved or rejected. An applicant with a higher LTV ratio is less likely to get approved than the one with a low LTV ratio. Thus, it is advisable for an individual to apply for a loan amount that keeps the LTV ratio under 75%.

Interest rate

Lenders offer interest rates based on the risk profile of the borrower. As the loan-to-value ratio is a good indicator of the risk profile, it is used to decide the rate of interest. Thus, a higher LTV ratio will mean a higher interest rate charged to the borrower. A lower LTV ratio results in a lower interest rate offered.

Down payment

If you reduce the LTV on your loan, you reduce the total cost of the loan. The LTV ratio is linked to the down payment that you have to pay on your loan against property. You can make a higher down payment on your loan to bring down the LTV ratio.

Borrower’s profile

The LTV ratio offered differs in the case of different lenders. Moreover, it is dependent on other factors including the type of property pledged as collateral and the type of occupation of the borrower. For example, the LTV ratio in the case of a self-occupied residential property is typically higher than that of a vacant or rented residential property. The LTV ratio in the case of commercial properties is lower than that of residential properties. Additionally, the LTV ratio is generally higher in the case of salaried individuals than that of self-employed individuals.

Calculating the LTV ratio is beneficial for borrowers as it can help them plan their loan accordingly. Moreover, an online LTV calculator can help them save the cumbersome process of visiting the physical office of a financial institution.

Summary

A loan-to-value calculator is an efficient tool for borrowers and lenders alike. It represents the ratio of the loan amount to the value of the mortgage property. Lenders see a high LTV ratio as a risk, which decreases one’s chances of approval. Moreover, high LTV ratio loans attract higher rates of interest. Hence, you should calculate your LTV ratio using an online LTV calculator before applying for a loan against property, as it can help you plan your loan-related finances better.

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