The portion of the value of a property that the lender can finance through a loan is known as the Loan-to-Value ratio. Financial Institutions like banks, NBFCs, and housing finance companies use this loan to determine and assess their portion of the risk involved in lending a home loan to a borrower.

A lender uses the LTV ratio to make sure that the credit advanced to a borrower is not more than the cost of the property.

Generally, home loans with high LTV ratio have a greater perceived risk of default, and therefore, loans approved with a higher LTV are costlier for the borrower. The formula to calculate the Loan-to-value ratio, as used by financial institutions to calculate the eligibility of a borrower, is as follows –

For example, you are buying a house with a value of Rs. 50 lakh and the LTV ratio determined by your lending institution is 80%, then you can avail a maximum home loan of Rs. 40 lakh from the lender. You will have to pay the margin amount of Rs. 10 lakh from your own pocket.

Guidelines regarding LTV Ratio In India

In India, the Reserve Bank of India has laid down the instructions regarding a fixed upper ceiling of LTV ratio for financial institutions vis-a-vis the amount of loan.
  • For Home loans with value up to Rs. 30 lakh, the LTV ratio can be a maximum of 90%. That means the bank will finance 90% of the value of the house, and the borrower will have to pay the margin of 10%.
  • When home loans range between Rs. 30 lakh to Rs. 75 lakh, the maximum LTV ratio is 80%.
  • In case the home loan is above Rs. 75 lakh, the LTV ratio cannot exceed 75%.
All the financial institutions lending towards home purchases have to abide by the RBI guidelines regarding LTV ratios. In case the borrower defaults in the future, the LTV ratio protects the lender against any downward correction of property prices.

How does a good LTV Ratio benefit Borrowers?

Financial Institutions that advance home loans prefer a lower LTV. A low LTV ratio indicates higher down payment by the borrower, thus reducing the lender’s risk.

Therefore, a low LTV ratio puts the borrower in an excellent position to negotiate lower interest rates and higher tenure of the loan.

Click here to learn more about your eligibility and apply for a home loan here


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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