How Is Home Loan Risk Weighting Linked To The Ltv Ratio?

 Housing loans are very popular when it comes to purchasing a property or plot of land. However, there are various aspects involved in housing loans. Since it is a very high-value loan, the LTV ratio, along with the risk measure, is a compulsory thing done by every loan provider. A loan-to-value (LTV) ratio in a housing loan is the percentage of value that a home loan provider can offer to the property owner. 

The loan provider examines the LTV ratio in order to ensure that they do not offer a higher amount than the actual property price. Before approval of a housing loan, the LTV ratio is fixed. It is important to understand the percentage of the property price that can be given by the loan provider. Based on the LTV ratio, the risk is measured. An increase in the LTV raises the borrower’s perceived risk, while a lower LTV ratio can get you better terms and better home loan interest rates. 

How is LTV related to risk in housing loans? 

The LTV ratio actually compares the amount of housing loan that you can borrow from any home loan provider against the total property value. If you want to buy a property, the LTV ratio will help you understand the total amount that you can get from the loan provider. Currently, the risk measure for any housing loan up to 30 lakhs with an LTV ratio of 80% is around 35%. If the LTV is between 80 and 90%, then the risk measure is 50%. The greater the LTV Ratio, the greater the risk. The LTV ratio actually ensures that the loan provider is not paying more than the property value. When the percentage of loan to value increases, the risk also increases. It means that if a bank approves 90% of the housing loan amount, it becomes very risky. 

How to reduce risk? 

In order to decrease the measure of risk in the loan-to-value ratio, you need to increase your credit eligibility. Individuals with a high salary and a good credit score always get a good ratio of property value. The measure of risk in such cases is always low. Therefore, it becomes feasible enough for loan providers to approve 80 to 90% of the property cost as principal loan value.

Finishing up

When you decide to take a home loan for salaried individuals, make sure you meet the home loan eligibility criteria. Keep your home loan interest rate affordable by choosing the right loan provider.