Loan to value ratio is the ratio of the amount of the asset financed by the creditor to the actual value of the asset.
Loan to Value or LTV Ratio = Amount of loan granted ÷ Cost of the Asset.
So, it is obvious that the LTV ratio has to be equal or less than 1.
Loan to value ratio - Decided by Bank
The LTV ratio is decided by the Bank based on their risk appetite and also after adherence to RBI guidelines.
It helps to set the minimum contribution of the borrower that the borrower has to invest when he wants to purchase an asset. The LTV ratio maintained by Banks differs from institution to institution, product to product or even on the total cost of the asset.
Example
For example, SBI may maintain a LTV ratio of 85% in case of Home Loans while HDFC may ask for 90%. Similarly the maximum LTV ratio that needs to be adhered in case of Car Loans in SBI may be 90%. Also they may go up to 85% LTV for cost of assets up to Rs.75 lacs, and for financing assets of value more than Rs.75 lacs, they may not go beyond 80% LTV ratio. The LTV ratio is a security benchmark against default risk that the Banks are exposed to.
A very new term, loan to value ratio. But a good effort by Sreya in making the topic clear by setting examples and formulas.The question arises that does the LTV differ for different customers too? LTV ratio has to be less or equal to one but what happens if it is more than one?
Why Loan to Value Ratio is needed? What is the benefit of it? Is this an expense to bank or to borrower? There are many doubts which should have been cleared. This phenomena seems to be little complicated for me. Although, the article is understandable but may not be enough.
This topic is a little difficult to grasp just at the first go, but the way it is been illustrates has made it easy to interpret. Kudos to the author for making an attempt to be very clear about explaining an unknown term for a common man. The term “loan to value ratio” has been coined effectively.
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