Assessing Risks: Utilizing the Loan-to-Value Calculator

Individuals planning to apply for a loan must develop a clear understanding of the various factors that have an impact on the loan interest rates. Having this understanding allows loan applicants to negotiate for the most beneficial loan terms and conditions, minimize the interest payout on the loan and therefore, also reduce the total cost of borrowing the loan. CIBIL score, income and job stability, age, debt-to-income ratio, etc., are some of the key factors that affect loans against property interest rates. One of the key factors that has an impact on the interest rate that a borrower gets on a loan is the loan-to-value ratio.

What is the Loan-to-Value Ratio? 

In the case of secured loans, such as home loans or loans against property, lenders decide the loan amount to be sanctioned based on the value of the pledged collateral. For instance, in the case of home loans, the LTV ratio can go as high as 85%. In other words, lenders can sanction up to 85% of a pledged property's market value as a loan. In the case of loans against property, the LTV ratio generally does not exceed 70%. 

The LTV ratio is calculated using the following formula: 

LTV Ratio = (Principal Amount/Market Value of the Pledged Collateral) × 100

Loan applicants can also use the loan against property loan-to-value calculator to calculate their LTV ratio for them. We will talk more about this handy tool later in this article.

Why Should Individuals opt for Low LTV Ratio Loans? 

The LTV ratio that one opts for plays a determining role in helping lenders decide the loan terms and conditions to be extended to them. When individuals opt for a high LTV ratio loan, they essentially request lenders to sanction the highest principal amount they can get against their property. In other words, in the case of high LTV ratio loans against property, the principal amount is quite high, which inevitably leads to high EMIs and therefore, increased chances of loan default. Thus, the risk involved for lenders is high in the case of high LTV ratio loans. To make up for the risk they are taking, lenders charge a high rate of interest on high LTV ratio loans. 

On the contrary, in the case of low LTV ratio loans, the loan amount is low and so are the EMIs, which enhances the affordability of the loan, thereby reducing chances of loan default. Thus, in the case of low LTV ratio loans, lenders generally charge a low rate of interest and are more willing to negotiate on the loan terms and conditions.  

What is a Loan-to-Value Calculator? 

A loan-to-value calculator is an online tool that lets users calculate their LTV ratio. Some LTV calculator also let users calculate the loan amount they are eligible to apply for alongside providing other details, such as the total interest payout on the loan and the total cost of borrowing the loan. Such loan-to-value calculators require users to go through the following steps before it gives them the home loan amount they are eligible for:

1. During the first step, LTV calculator users are required to declare whether they are salaried or self-employed. 

2. During the next step, they are asked to reveal the value of the pledged collateral. 

3. After this, the loan applicant is asked to declare whether the property is residential or commercial and select their desired loan tenor based on their repayment capacity. 

4. Finally, the borrower must enter the rate of interest they are being offered. 

As soon as a borrower enters these details, the loan-to-value calculator gives them their tentative EMIs and the total interest payout on the loan. With all this information at their disposal, it becomes easier for the loan applicant to decide if they should indeed be availing themselves of the loan amount they have in mind and judge the affordability of this loan.