Any homeowner can pledge real estate they own as collateral to get a large sum of money as a loan against property. Such loans offer lower interest rates compared to unsecured loans and complete end-use flexibility.
However, before an applicant seeks for a loan against property, he/she should use an LTV calculator by visiting their preferred lender’s website. It helps them understand how much of the home’s price they are eligible to get as a loan.
Ways an LTV ratio calculator helps manage a mortgage loan
From a borrower’s perspective, an online LTV calculator can help with:
Selecting the right loan amount
It is crucial to get this decision right because selecting a substantial loan will lead to a larger EMI amount. As a result, the gross payable interest also goes up unnecessarily for the borrower.
Negotiating for a low interest rate
When a lender offers a high LTV ratio close to 80%, it means they have greater confidence in the borrower. One can grab this opportunity to attain a more favourable agreement with a comparatively lower interest rate.
Determining the optimal tenor
LTV calculators offer several additional features that enable users to see their EMIs and download a detailed repayment schedule. This schedule shows the principal and interest component of each EMI, which helps the borrower avail tax benefits. One can conclude how long they should stretch the repayment window.
Important things to consider about the LTV ratio
Here are the major aspects associated with a loan-to-value ratio:
- Loan-to-value or LTV is simply the ratio of the loan amount sanctioned by the lender to the actual property value.
- As a property loan involves a large sum, the concerned bank or NBFC performs an adequate risk assessment before finalising the LTV.
- The latest norms enable a borrower to avail up to 70% of the property value as a loan against property from a lender. Again, it depends on the customer profile and the projected property.
- As the property’s current market value impacts the LTV, the financing institution assigns an expert team to evaluate the house’s valuation. Thus, property values are always different from the sale values.
- Sometimes, a candidate may become eligible for an 80% LTV for a loan against property. However, these offers are limited to only a handful of financial institutions and those having an excellent credit profile can avail such offers.
Steps to use a LTV calculator
Any lender offering an LAP provides an easy-to-use LTV calculator on their official website. Here are the steps to operate this tool:
Step 1: Enter the principal, estimated property value and loan against property interest rate, in the relevant fields.
Step 2: Click on ‘Calculate’.
Let’s assume the lender has proposed a mortgage loan deal where the home’s value is Rs.70 lakh and they are willing to finance up to Rs.42 lakh. In this case, when a person clicks on the ‘Calculate’ button, the LTV ratio will come out as 60%.
Note: The LTV varies according to the property type as well. For instance, one can expect to get almost a 10% higher LTV ratio for residential properties compared to commercial properties. However, industrial spaces also attract a high LTV based on their overall occupancy status.
Factors that affect the LTV ratio of a borrower
Starting from age to present financial obligations, many factors combine to determine an individual’s LTV for a mortgage loan. Here one can learn about the impact of each parameter briefly:
A low debt-to-income ratio, preferably lower than 50%, can help one secure higher LTV.
A person’s credit score speaks significantly about their credit management skills. Therefore, high credit scores of 750 or above help secure a high LTV ratio.
A person with more working years has a greater chance of receiving a larger principal amount.
Many lenders also offer pre-approved loans to eligible candidates. These offers are attached to loan products like home loans, loans against property, etc. The borrowers must present some details like full name, contact details, and others to check their pre-approved loan eligibility.
So, by combining pre-approved offers and using the LTV calculator in the right way, one can easily bag beneficial loan offers. These form an important part of planning as they help reduce the toll of repayment down the years.
Frequently Asked Questions
Q: What is the Lifetime Value (LTV) in the context of strategic planning for investments?
A: The Lifetime Value (LTV) is an estimation of the total revenue a customer is expected to generate over their entire relationship with a business. It is a key metric used in strategic planning for optimizing investments.
Q: How do I calculate the Average Purchase Value (APV) for LTV?
A: To calculate APV, divide the total revenue generated from a customer by the total number of purchases. It provides an average value for each transaction.
Q: What is Purchase Frequency (PF) and how is it determined in LTV calculation?
A: Purchase Frequency (PF) is the average number of purchases a customer makes over a specific period. Calculate it by dividing the total number of purchases by the number of unique customers.
Q: What does Customer Lifespan (CL) represent in LTV calculation?
A: Customer Lifespan (CL) is the average duration a customer continues to make purchases. Determine it by dividing the sum of customer relationships by the number of unique customers.
Q: How can I use the LTV formula for strategic planning?
A: Multiply the Average Purchase Value (APV), Purchase Frequency (PF), and Customer Lifespan (CL) to obtain the Lifetime Value (LTV). This figure guides decisions on customer acquisition costs, marketing budgets, and overall investment strategies.
Q: Why is LTV important for businesses in strategic planning?
A: LTV provides insights into the long-term value of a customer, enabling businesses to make informed decisions on resource allocation, customer retention strategies, and sustainable growth.
Q: Can LTV be used for different types of businesses?
A: Yes, the LTV concept is applicable to various industries. It is a versatile metric that aids businesses in understanding the value of their customer base and tailoring strategies