What is LTV (Loan-to-Value) Ratio and How is it Calculated?

Table of Contents

If you’re applying for a loan like a home loan, or a loan against mutual funds or shares, you’ll often hear about the Loan-to-Value (LTV) ratio. Lenders use this number to decide how risky it is to lend you money.

Knowing how LTV works can help you make better borrowing choices and increase your chances of getting a loan. We’ll explain what LTV means, how to calculate it, and why it matters when you apply.

What does LTV mean?

LTV (Loan-to-Value) ratio is a financial metric used by lenders to determine the risk of lending money against a secured asset. It represents the percentage of the asset’s market value that the lender is willing to provide as a loan.

For example, if you want to take a loan against a property worth ₹50 lakh, and the lender offers an LTV ratio of 70%, you can borrow up to ₹35 lakh. The higher the LTV ratio, the more money you can borrow. However, higher LTV also means higher risk for the lender, which may affect your interest rate or loan approval chances.

What is the full form of LTV?

The full form of LTV is Loan-to-Value ratio. It is a widely used term in banking and finance. Whether you apply for a loan against securities, mutual funds, a home, or gold, lenders assess the LTV ratio before deciding how much to lend.

Why is the LTV ratio important?

Lenders use the LTV ratio to assess two main factors:

Risk for the lender: A high LTV ratio means the lender is giving out a larger loan compared to the value of the asset, which increases their risk in case of default.
Borrower’s contribution: A lower LTV indicates the borrower has a higher stake or equity in the asset, which reduces the lender’s risk.

For borrowers, a favorable LTV ratio can mean better loan terms, such as:

Lower interest rates
Higher chances of approval
Flexible repayment terms

If the LTV is too high, lenders may reject the loan application or charge a higher interest rate to reduce their risk.

What does LTV 80% mean?

An LTV of 80% means that the lender will provide a loan equal to 80% of the asset’s current market value, while the borrower must cover the remaining 20% through personal funds.

For example:

Suppose you want to purchase a house worth ₹1 crore.
At an LTV ratio of 80%, the lender will finance ₹80 lakh.
The remaining ₹20 lakh must be paid by you as a down payment.

This concept is not limited only to home loans. Even for loans against securities or mutual funds, if the LTV ratio is 80%, you can only borrow up to 80% of the asset’s market value.

In India, the Reserve Bank of India (RBI) often sets guidelines on maximum LTV ratios for different types of loans. For example, home loans may allow up to 90% LTV for smaller ticket sizes, while loans against shares or mutual funds usually have lower LTVs due to market volatility.

How is LTV calculated?

The formula for calculating the Loan-to-Value ratio is simple:

LTV Ratio = (Loan Amount ÷ Asset’s Current Market Value) × 100

Let’s look at some examples for better understanding:

Example 1: Home Loan

Property Value = ₹50,00,000
Loan Amount = ₹35,00,000
LTV = (35,00,000 ÷ 50,00,000) × 100 = 70%

Example 2: Loan Against Mutual Funds

Mutual Fund Portfolio Value = ₹10,00,000
Loan Approved = ₹5,00,000
LTV = (5,00,000 ÷ 10,00,000) × 100 = 50%

Example 3: Gold Loan

Gold Value = ₹5,00,000
Loan Amount = ₹3,75,000
LTV = (3,75,000 ÷ 5,00,000) × 100 = 75%

Thus, the calculation is straightforward. The challenge, however, lies in how lenders value the asset, as market prices can fluctuate.

Factors affecting the LTV ratio

Several factors influence how lenders decide the LTV ratio for different loans:

Type of asset: Real estate often has higher LTVs compared to shares or mutual funds, which are subject to market volatility.
Regulatory guidelines: In India, the RBI sets limits for maximum LTV on specific loans, such as gold loans and housing loans.
Borrower’s profile: Credit history, income stability, and repayment capacity may influence the LTV offered.
Market conditions: In a volatile market, lenders may reduce LTV ratios to protect themselves from risk.

LTV Ratio in Different Types of Loans

Home Loans: Usually 70% to 90%, depending on the property value.
Loan Against Securities: Often 50% as market fluctuations can impact the collateral’s value.
Gold Loans: Typically 70% to 75%, based on gold prices.
Vehicle Loans: Around 80% to 90% of the car’s on-road price.

Tips to Improve Your LTV Ratio

If you want to get a better LTV ratio and increase your loan approval chances, consider these tips:

Maintain a good credit score to improve your credibility.
Opt for assets with stable value, such as real estate or sovereign gold bonds.
Contribute a higher down payment to reduce the lender’s risk.
Apply during favorable market conditions when asset values are stable.

Conclusion

The Loan-to-Value (LTV) ratio is a key parameter that determines how much loan you can get against your asset. By understanding what LTV means, how it is calculated, and what an LTV of 80% indicates, you can plan your finances better and avoid surprises during the loan approval process.

Whether you are applying for a home loan, a loan against securities, or a loan against mutual funds, knowing your LTV ratio helps you negotiate better terms and ensures you borrow responsibly.