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Loan to Value (LTV) is the percentage of Loan amount against the Asset Value.
How to Calculate LTV?
For Example if you need a loan against your property, which has a Value of Rupees 10 Lakhs. An LTV of 60 means, the bank will give you loan upto 60 percent of your property. Which means you can get upto Rs. 6 Lakhs only.
LTV is calculated using the Basic Formula : (Loan Amount + Debts) / Property Value
LTV is used for almost all mortgage loans like Housing Loans, Car Loans, Gold Loans etc.
Use of LTV
It is a indicator used by lenders (or banks) to calculate the risk of the loan if someone defaults the loan. If there is a defaulter for the loan then Bank has to sell the mortgaged property/ Asset to recover the amount including all stamp charges and legal charges. Lower LTV’s are provided for risky assets which may have volatile price movements.
RBI Notifications
In March 2012 RBI has asked the Gold loan companies to lower the LTV’s to 60 percent, which led to the stock price tumble for Gold Loan companies like Manappuram and Muthoot. (read the RBI notification here)
In Feb 2012 RBI asked commercial banks to fix LTV for Housing loans at 80 percent for loans above 20 Lakhs and at 90 percent for Loans below 20 lakh.(read the RBI notification here)
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