Last Updated on 26/05/2020 by Deepak Singla
While availing a secured loan from any major financial institution, the entire value of the mortgaged asset is not extended as credit. Only a stipulated portion of it can be obtained, depending upon the LTV full from is loan to value ratio followed by the lending institution. Such provisions are undertaken by financial institutions to dilute the risk associated with availing such loans. Total loan value that can be availed can be calculated using the stipulated loan to value formula and associated online calculators.
How does a loan to value calculator work?
Defaults on secured loans of high asset value can be deemed as risky investment ventures as the total loss generated can be massive. If you know the market value of your property then the maximum loan value that can be sanctioned can be easily determined using the following formula –
LTV calculator = Mortgage amount divided by appraised property value
The value of credit extended to an individual is key to calculating the total loan-to-value percentage. For instance, if an individual avails a loan of Rs. 50 Lakh by keeping collateral of Rs. 80 Lakh, then, the ratio will be –
LTV of credit extended = Rs. 50 Lakh x 100
Rs. 80 Lakh
= 62.5%
The loan-to-value ratio depends on several factors and is different for every borrower.
Factors affecting loan to value ratio –
Credit history
Past borrowing patterns of an individual are carefully analyzed to determine his/her credibility. Such history is summarised through the CIBIL score of an individual, a three-digit score reflecting all repayment patterns on past credits availed.
An individual possessing a high credit score has a relatively lower probability of defaulting on loans. Thus, financial institutions extend high-value loans against a mortgaged property to such applicants. LTV in such cases can be substantially high.
In the case of individuals having a history of irregular loan repayment or arrears in their ledger, loan-to-value of credits extended is relatively lower.
Thus, individuals should be aware of their CIBIL score before applying for a loan against property to avail credits at a high LTV ratio.
Income
Proof of income has to be submitted to lending institutions for loan approval. In the case of employed individuals, salary slips of the previous months have to be furnished. Entrepreneurs can furnish financial statements of the business for the preceding year for this purpose.
Proof of income is a vital document as it shows the repayment capability of a borrower. EMIs can only be paid on time if individuals have an adequate amount of income for the same.
Consequently, an individual that earns a substantial amount every month is likely to receive a high secured loan-to-value ratio.
FOIR
FOIR, or Fixed Obligation to Income Ratio, is the ratio of monthly obligation against an applicant’s income. Generally, FOIR comprises rent, food costs, and other essential expenses. Individuals should ideally have a FOIR accounting for up to 40% of their total income.
An applicant with a lower FOIR is likely to gain high value secured advances at high LTV.
A loan against property is processed by financial institutions after careful analysis of the credibility of an applicant through the above-mentioned pointers. Individuals with better creditworthiness can avail advances at a high loan-to-value ratio, coupled with lower interest rates. Major NBFCs such as Bajaj Finserv often offer such benefits, reducing the financial burden on borrowers.
They also provide pre-approved offers on such credits, which render the process quick and easy. Pre-approved offers are available on numerous financial products such as home loans, business loans, personal loans, loans against property, etc. You can take a look at your pre-approved offer by sharing your name and phone number.
Using a loan-to-value calculator, applicants can get an approximate idea about the maximum value of the credit they can avail against the property. Such loans can be used to fund any expenses, related to personal or business requirements, as it has no associated end-use restrictions. Nonetheless, the eligibility criteria stipulated by the respective lending institution have to be satisfied for assured approval of funds.
A loan against property is an ideal form of advance aiming to ensure all high-end expenses of an individual are covered with ease, provided he/she can avail credits at high LTV rates. Using an online tool such as a loan to value calculator simplifies the entire process of determining the correct amount, and helps plan one’s finances better.
