All loans can be broadly categorized into two different categories: secured and unsecured. Secured loans are loans backed by collateral. These are loans that borrowers avail of by pledging an immovable asset, such as gold or property, as security.
Loans against property are a type of secured loan. These are loans secured by residential or commercial property or land. Loans against property carry several benefits. Loan against property interest rates are low. Borrowers can avail of these loans for a long repayment tenor. The loan amount is substantial, going up to 75% of the pledged collateral’s fair market value. Such a substantial loan amount makes life easier. However, it also increases the burden of loan repayment.
Therefore, borrowers must ensure low mortgage loan interest rates, as a low rate of interest leads to affordable loan EMIs.
Lenders decide the mortgage loan interest rates to be extended to a loan borrower after considering several different factors, such as the quality of the pledged collateral, the CIBIL score and income of the loan borrower, their employment history and professional stability, fixed income to obligation ratio, loan tenor opted for, and the LTV ratio they have opted for. This article discusses the importance of selecting the right LTV ratio.
What Is The LTV Ratio?
Loans against property or mortgage loans are backed by collateral, and the value of the collateral helps lenders decide the loan amount and the mortgage loan interest rate to be extended to the loan borrower. The LTV ratio is the ratio of the loan amount applied to the value of the property pledged as collateral. The LTV ratio can be calculated using this simple formula:
LTV Ratio = (Loan Value / Value of the Pledged Collateral) x 100
Why Is The LTV Ratio Important?
The LTV ratio helps lenders assess the risk involved in doing business with a loan applicant. When a loan applicant applies for a high loan amount compared to the value of the pledged collateral, the lender’s risk goes up.
Therefore, when borrowers opt for a high LTV ratio loan, lenders generally charge a higher loan against a property interest rate. On the other hand, when a borrower opts for a low LTV ratio loan or the loan amount is low, the chances of the loan borrower defaulting on loan repayment are also low. Therefore, low LTV ratio loans help loan borrowers secure a low property loan interest rate.
The LTV ratio for loans against property can go as high as 75% for low-value loans and up to 60% for high-value properties. In other words, you can borrow up to 75% of your property’s market value. However, to make loan repayment easy and to get the best loan terms and conditions, borrowers must never opt for a high LTV ratio loan.
What Is A Loan-To-Value Calculator?
A loan-to-value calculator is an online tool that lets loan users calculate their LTV ratio before they start applying for a property loan. If the loan applicant finds that the LTV ratio they have opted for is too high, they can lower the loan amount to bring it down and be considered eligible for better or lower interest rates.
The LTV calculator is free to use. They are also available easily on the Internet. So, if you are planning to apply for a mortgage loan, make sure to use this calculator.
Final Words
Loans against property are one of the most convenient and secure ways of arranging funds, especially if you need money to handle a major financial emergency. However, borrowers must remember that these loans require borrowers to pledge a property they entirely own as security, and the inability to pay loan EMIs for six months or more can lead to the loan borrower losing the ownership of the property.
Therefore, borrowers must apply for a property loan only when they are financially ready for the liability. Further, they must always use all online tools, such as the loan against property EMI calculator and loan against property eligibility calculator, to increase their chances of availing of the loan on the most beneficial loan terms and conditions.