The term mortgage loans is synonymous with the terms loans against property or property loans in India. These are loans availed of by pledging a residential or commercial property or even a piece of land as collateral. Several different factors determine the mortgage loan interest rates.
The loan applicant’s credit score, debt-to-income ratio, job and income stability and the quality of the pledged collateral are some of the things that lenders take into account when deciding the mortgage loan interest rates to be extended to a loan applicant.
Mortgage loan interest rates are also decided after taking into account the LTV ratio the loan applicant has opted for. In this article, we talk about the LTV ratio and the LTV calculator.
What is the LTV Ratio?
Secured loans are loans sanctioned against a collateral or security. The presence of the security essentially helps reduce the risk for the lender.
The LTV ratio is the percentage of the pledged collateral’s total value that the borrower wants as a loan. The LTV ratio can be calculated using the following formula:
LTV Ratio = (Value of the loan/ Value of the Pledged Collateral) × 100
For lenders, the LTV ratio is important and it helps them decide the mortgage loan interest rates to be extended to a loan borrower as it helps them accurately ascertain the risk in doing business with the loan borrower.
In the case of high LTV ratio loans, the loan amount is high and therefore, the chances of a loan default are high too. Consequently, these increased chances of loan default compel lenders to charge a high-interest rate on these loans.
On the other hand, when a borrower opts for a low LTV ratio loan, chances of a loan default decrease considerably due to affordable EMIs and therefore, low LTV ratio loans are sanctioned at much better loan terms and conditions.
What is an LTV Calculator?
An LTV calculator is an online tool that lets borrowers calculate the loan amount they are eligible for, the EMIs they will have to pay each month to clear their desired loan amount within their preferred loan tenor and the total interest that their selected combination of loan amount, tenor and rate of interest will accumulate.
How to Use an LTV Calculator?
Using a mortgage loan LTV calculator is fairly easy and straightforward. It requires one to go through the following steps:
1. The first step in the process is selecting whether you are salaried or self-employed. Next, you must also declare whether you wish to pledge a residential or commercial property as collateral.
2. Next, enter the current market value of your property, alongside the loan tenor you wish to opt for and the mortgage loan interest rates you are being offered by your lender.
Once you enter these details into the LTV calculator, the calculator will give you your loan EMIs, total interest payout and the loan amount you are eligible for.
If you are okay with the loan EMIs and the total cost of borrowing funds, go ahead and apply for the loan amount you are eligible for. If you find the loan EMIs unaffordable, you can change the loan value or tenor to arrive at loan EMIs that you fund affordable.
Benefits of an LTV Calculator
1. An LTV calculator stops you from making any loan-related mistakes. It helps you choose the right combination of loan amount and tenor for you so that your loan EMIs stay affordable and easy to repay.
This also saves you from defaulting on loan repayment and losing opportunities to access credit on better loan terms and conditions in the future.
2. The LTV calculator tells you the loan amount you are eligible for and when you apply for a loan amount you qualify for, your ability to negotiate for better loan terms and conditions, such as low-interest rates, higher loan sanction, etc., increases. This, in turn, makes loan repayment simpler and easier.
3. The LTV calculator also makes sure you are not applying for a loan amount that will lead to a significant interest outgo and therefore, reduced ROI.
Conclusion
In conclusion, the LTV calculator can make decision-making and planning much easier in the case of mortgage loans. Therefore, all loan applicants must make this important tool a part of their loan journey.
