Loan Basics. What determines your home loan amount?

For most people, buying a house is the single biggest financial commitment they make in their lives. One of the most critical aspects of this decision is choosing the most suitable home loan deal. While awareness about the factors influencing home loans has increased, one aspect that is still relatively less known is the loan-to-value (LTV) ratio.

LTV ratio is the proportion of your property’s value that will be financed by your lender. It denotes the amount you have to arrange out of your own pocket for making the home purchase/construction. The higher the LTV ratio, the lower you need to pay as down payment from your pocket while buying a house. Lenders will set this ratio while keeping in mind the various risks involved in lending to you.

Currently, both banks and housing finance companies (HFCs) have upper limit of 90 per cent LTV ratio on home loans up to ₹30 lakh, 80 per cent on home loans between ₹30 lakh-75 lakh and 75 per cent on loans over ₹75 lakh. Sometimes, HFCs may sanction higher LTV ratio than banks. However, not everyone gets the maximum permitted sum.

First, lenders consider your credit score while setting your LTV ratio. As people with low credit scores carry higher risk of defaulting in loan repayments, lenders try to minimise their lending risk by providing lower loan amount against the property value. Thus, if you are planning to buy a house, make sure you take out your credit report and improve your credit score, if necessary.

Your age and job profile also matters.Lenders usually prefer you to complete your entire loan repayment by the time you turn 70. Thus, borrowers nearing their retirement are usually asked to make higher contribution towards their home purchase or construction. Opting for a co-applicant of lower age may not be of much help either, as lenders consider the age of the older co-applicants while deciding the loan tenures.

Generally, salaried employees are offered higher LTV ratio than self-employed applicants, given higher income certainty. Even among salaried employees with similar profiles, those working with reputed organisations are offered higher LTV ratios as the credit risk associated with them is considered lower.

Finally, the ratio of your financial obligations to income is also taken into account. This ratio reveals the proportion of your total income that will go towards servicing your EMI for the new home loan and other payment obligations like house rent, existing EMIs, insurance premiums, etc. While some lenders use your net monthly income to calculate this ratio, others consider gross monthly income. As lenders prefer this ratio to be within 40-50 per cent, exceeding this may lead the lender to either increase your loan term or decrease your LTV ratio.

While a high LTV may be good for you, it runs the risk of pushing up your borrowing rate. As higher LTV ratio involves higher credit risk for lenders, they try to hedge risk by charging higher interest rate for such loans. Usually, home loans with LTV ratios of 80 per cent or less are offered the best interest rates.

However, in line with the government’s focus on affordable housing, many lenders have started charging lower interest rates for loans below ₹30 lakh, though the maximum LTV here can touch 90 per cent. The list includes almost all major home loan lenders like SBI, HDFC, ICICI Bank, Axis Bank and Indiabulls Home Loans. The difference between the lower limit of interest rates for loans up to ₹30 lakh and those between ₹30 and ₹75 lakh can be as high as 30 basis points. Thus, if your loan amount crosses ₹30 lakh by a few lakhs, increase your own contribution to bring the loan amount within ₹30 lakh. This could reduce your interest cost.

The writer is CEO and Co-Founder, Paisabazaar.com

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