Buying a home, upgrading your car, or pledging gold for quick funds often starts with one big question: How much will the bank actually lend me? The answer
largely depends on a single number that quietly shapes your loan offer -- the Loan-to-Value (LTV) ratio. Whether you are a first-time homebuyer or someone planning a secured loan, understanding LTV can help you plan your savings better, negotiate smarter, and avoid surprises during loan approval. Simply put, LTV decides how much of the asset’s value the lender is willing to finance, and how much you must pay from your own pocket.
What is Loan-to-Value (LTV) ratio?
The Loan-to-Value (LTV) ratio compares the loan amount to the market or appraised value of the asset being pledged as collateral. It is expressed as a percentage.
A lower LTV signals lower risk for the lender, while a higher LTV means higher exposure and risk.
How is LTV calculated?
LTV (%) = (Loan Amount ÷ Asset Value) × 100
Understand with example: If you purchase a house worth Rs 50 lakh and the bank sanctions a loan of Rs 40 lakh then:
- LTV = (40,00,000 ÷ 50,00,000) × 100 = 80 per cent
This means the bank is funding 80 per cent of the property value, and you must arrange the remaining 20 per cent as a down payment.
Why LTV matters across different loans
The LTV ratio plays a crucial role in determining loan eligibility, interest rates, and overall borrowing costs.
1. Home loans: For home loans, banks usually finance 75–90 per cent of the property value, depending on borrower profile and property cost. A lower LTV can help you secure:
- Lower interest rates
- Better loan terms
- Easier approval
2. Car loans: In car loans, lenders generally offer 80–90 per cent financing of the on-road price. A higher down payment (lower LTV) often results in reduced EMIs and better interest rates.
3. Loans against securities: When shares or mutual funds are pledged, the LTV depends on market volatility. A higher LTV increases lender risk and may attract higher interest.
4. Gold loans: As per RBI guidelines, lenders can offer loans of up to 75 per cent of the gold’s value.
Factors that influence your LTV ratio
Several elements decide how much LTV a lender is willing to offer:
- Asset type and location: Prime properties or high-quality assets usually attract better LTV ratios.
- Credit score: A strong credit score improves lender confidence and can help you secure a higher LTV on favourable terms.
- Loan size: Luxury or high-value assets may have stricter LTV caps despite higher borrower income
- Regulatory guidelines: RBI and other regulators periodically revise LTV norms, especially for housing and gold loans.
How LTV impacts your borrowing cost
- Interest rates: Higher LTV loans often carry higher interest rates due to increased risk.
- Down payment: Lower LTV means higher upfront payment, but it reduces long-term interest burden.
- Loan approval: Very high LTVs may lead to stricter scrutiny or partial rejection.
- Insurance costs: In some cases, higher LTV loans may require mortgage insurance, increasing overall cost.
How to reduce your LTV ratio
Borrowers can improve their loan profile by lowering LTV:
- Increase your down payment to reduce loan size
- Improve your credit score by clearing dues on time
- Choose assets within budget to avoid excessive leverage
- Ensure fair valuation during property appraisal
What are risks of high LTV loans
While high LTV reduces upfront cost, it comes with risks:
- Higher EMIs and financial stress
- Greater chance of foreclosure in case of default
- Risk of negative equity if asset value falls
- Additional insurance or compliance costs
LTV and home loan eligibility: What borrowers should know
Even if your income qualifies you for a large loan, banks will cap the loan amount based on the applicable LTV ratio. This ensures lenders are protected against price volatility over long loan tenures.
Lower LTV loans are seen as safer -- and that safety often translates into lower home loan interest rates and better repayment flexibility.
