The loan to value (LTV) ratio is a financial ratio of the loan against property over the market value of the property. It is represented in a percentage figure. The LTV ratio changes with time as it is based on the current market price of the property. It should be noted that the LTV ratio should be considered based on the property’s recent valuation, which should not be older than three months. The LTV ratio is a crucial factor for both borrowers and lenders, as the latter assesses the lending risk while the former evaluates the proposed loan amount using this concept. The LTV ratio is generally calculated during a home purchase, refinancing a mortgage, or simply while tapping into home equity.
What is an LTV Calculator?
A LTV calculator is an online financial tool used to calculate the proportion of the true value of the property against the amount you owe on the loan you took to purchase it. This ratio is used to determine home loans for both purchases and refinances.
The formula used to calculate loan-to-value is
LTV = Loan Amount
Appraised value of the property
LTV ratio (%) = Loan Amount 100
Appraised value of the property
For instance, if the market value of your residential property is Rs.50 lakh and your LTV ratio is 80%, then a value of Rs.40 lakh could be availed of as the loan amount from a lender.
How to Use an LTV ratio Calculator?
The LTV ratio calculator evaluates you on the following: employment type, property type, property value, loan tenor, and rate of interest. The LTV calculator uses an easy, step-by-step process, to calculate the LTV ratio. Follow these steps to calculate the LTV ratio using the calculator:
- Enter the type of loan you’re considering taking: property purchase, refinance by mortgaging, etc.
- Choose the type of property: residential property or commercial property
- Enter the current market or appraised value of the property
- Input how much of a down payment you’re willing to make (in case of property purchase)
Once you input these values, the loan-to-value ratio calculator will give you results instantly.
Uses of an LTV Calculator
The LTV ratio calculator is used to understand the possible loan amount you can apply for from a lending institute by mortgaging property. Evaluating your loan-to-value ratio will help you decide:
- The proposed loan term will be ideal for your proposed loan amount. A longer loan tenor (say about 25 years) will allow lower EMI, but the borrower will end up paying a large amount of interest. A shorter loan tenor (say about 12 years) with a fixed interest rate, means you can pay less interest over the entire loan tenor. Therefore, the borrowers should check their monthly budget before opting for a shorter loan tenor, as the payable EMI will be considerably higher.
- A high LTV ratio might mean that you need to shell a lot of money for the down payment. It would be wise to reconsider the property that has to be purchased (in case of a home loan) according to your budget and savings. Opting for a low-valued property could help lower the LTV ratio and thus, will allow paying a lower down payment.
- When your mortgaged property fetches you a high-value LTV ratio, you might be allowed to negotiate for a lower interest rate by considering an adjustable-rate mortgage (ARM).
- With a lower LTV ratio, your eligibility for a home loan increases. This means that you are in a position to negotiate for better terms on your home loan and thus, get a better interest rate.
Factors on Which LTV Calculator Depends:
- Age of the Property: An old property is likely to fetch a lower loan-to-value ratio when compared to a new property. This is due to the reason that the resale value of an old property is considerably lower than a new property.
- Types of Property: The types of property that are considered for LAP include self-occupied residential property, rented residential property, self-occupied commercial property, rented commercial property, firm, institute, and others. Even under-construction houses could be considered for LAP mortgage provided the builder is authorized and the construction is 90 percent complete. A residential property with a higher resale value will be eligible for a higher loan-to-value ratio. The quality of the property is inspected by an expert sent by the lender for assessing the current market value of the property.
- Location of Property: A residential property in an elite area will have a high resale value, which is likely to provide you with a higher LTV ratio. The city and location of the property will affect the value of the property, which will in turn affect the LTV ratio.