What is Home loan to value ratio? By Adhil Shetty, CEO, BankBazaar.com

Mr. Adhil Shetty,  CEO,  BankBazaar.co

The RBI (Reserve Bank of India) has brought about many new directives & guidelines in order to curb speculation in the property market as the sector stands poised for a revival post recession recovery.

One of the guidelines that has dampened the mood of real estate developers/promoters as well as prospective house buyers is the exclusion of stamp duty, registration fees and all other allied charges while calculating the loan to value when taking a home loan.

Understanding the loan to value..!
Simply stated the Loan To Value (LTV) is the ratio of the amount that you wish to borrow for a house to the actual value of the house.

The LTV can be calculated from the actual worth of the house, the mortgage being taken and the down payment that has been made prior to the loan. For example, the value of a house is Rs. 40 lakh and a down payment of Rs. 4 lakh has been made a loan of the balance amount that is Rs. 36 lakh  is being sought. In this case the LTV comes to be Rs. 36 lakh  of the actual value of Rs. 40 lakh which works out to 90%. Thus the LTV is 90%.

New RBI Guidelines..!
This guideline implies that the borrowers will now have to pay a higher amount from their resources as the loan that can be approved by the banks will be reduced by about 5 % to 10 %. The stamp duty varies from 5 to 10 % of the value of the property and the registration fees are nearly  5% of the value. Additionally, there are a few charges such as VAT (Value added Tax) and service charges of which nearly  2% may be applicable in certain cases.

All these charges were earlier included in the total cost of the home and then 80 % of the total cost was financed by the banks/housing finance companies. This new RBI guideline will exclude such charges while calculating the value of the property and these expenditures will have to be borne by the borrower. Thus the buyer’s contribution will increase from a pervious figure of 10 % to 15 % to about 20 % to 25 % of the value of the property.

The real estate developers/promoters are also apprehensive about the impact of these new guidelines and feel that the move may adversely affect the sales. This additional burden in the down payment structure may discourage the buyers from taking a loan and buying a house. However, the banks are confident that there will not be much impact as the buyer is now actually taking a smaller loan, which will imply lesser interest and smaller EMIs

The Reason..!
The RBI has stated two primary reasons for taking such a step in the current financial situation. Firstly, this will discourage speculation in the housing sector & people will use housing loans for buying houses to reside and not as an investment in this booming sector. The second aim of the RBI in this guideline is to keep the lending market protected in case of a surge of defaulters and delinquency. Such a move will ensure that the borrower is taking a loan that he is actually capable of repaying and in case he does not the bank is in a position to retrieve its money by disposing the property to recover a lower loan amount.

As on date this guideline is applicable only to the banks that give housing  loans &  housing finance institutions like the LIC housing, HDFC, etc, are still providing up to 80% of the total cost of the property which includes the stamp duty and registration fees. However, this anomaly may not go over looked for long and the same restrictions will become applicable for these institutions also, eventually.

About BankBazaar.com
BankBazaar.com is the world’s first neutral online marketplace that gives you instant customized rate quotes on loans and insurance products. You can instantly search for, compare and apply for loans, credit cards & insurance products on this site. Since it partner with India’s leading financial institutions &  insurance firms,

BankBazaar.com was founded by a group of US-returned and homegrown entrepreneurs from Deloitte, Amazon.com, Capital One, Kraft, Microsoft and includes alumni from College of Engineering Guindy, REC-NIT Trichy, Columbia University, Georgia Tech, Virginia Tech and BITS Pilani.
We are based in Madras, India and are backed up by a fabulous group of investors from India and the USA.

Mr. Adhil Shetty, Founder & CEO

Prior to BankBazaar.com, Mr. Adhil lived in New York City and managed Deloitte Touche Tomahatsu’s US East alliances with the world’s leading Information Management Company. Earlier in his career, Adhil worked with Cisco Systems as an engineer in Bangalore and San Jose. Adhil has a Masters degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelors degree in Engineering from the College of Engineering Guindy, Anna University.
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Photo : Hindu

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