What
Determines Your Housing Loan Amount?
by Mr. NAVEEN
KUKREJA, Paisabazaar.com
For most people, buying
a house is the single biggest financial commitment they make in their lives.
One of the most critical aspects of this decision is choosing the most suitable
home loan deal.
While awareness about
the factors influencing home loans has increased, one aspect that is still
relatively less known is the loan-to-value (LTV) ratio.
What is LTV ratio?
LTV ratio is the
proportion of your property’s value that will be financed by your lender. It
denotes the amount you have to arrange out of your own pocket for making the
home purchase/construction.
The higher the LTV
ratio, the lower you need to pay as down payment from your pocket while buying
a house. Lenders will set this ratio while keeping in mind the various risks
involved in lending to you.
Currently, both banks
and housing finance companies (HFCs) have upper limit of 90% LTV ratio on home
loans up to Rs. 30 lakh, 80% on home
loans between Rs. 30 lakh-75 lakh and 75% on loans over Rs. 75 lakh.
Sometimes, HFCs may
sanction higher LTV ratio than banks. However, not everyone gets the maximum
permitted sum.
First, lenders consider
your credit score while setting your LTV ratio.
As people with low
credit scores carry higher risk of defaulting in loan repayments, lenders try
to minimise their lending risk by providing lower loan amount against the
property value.
Thus, if you are
planning to buy a house, make sure you take out your credit report and improve
your credit score, if necessary.
Your age and job profile
also matters.Lenders usually prefer
you to complete your entire loan repayment by the time you turn 70.
Thus, borrowers nearing
their retirement are usually asked to make higher contribution towards their
home purchase or construction. Opting for a co-applicant of lower age may not
be of much help either, as lenders consider the age of the older co-applicants
while deciding the loan tenures.
Generally, salaried
employees are offered higher LTV ratio than self-employed applicants, given
higher income certainty.
Even among salaried employees
with similar profiles, those working with reputed organisations are offered
higher LTV ratios as the credit risk associated with them is considered lower.
Finally, the ratio of
your financial obligations to income is also taken into account. This ratio
reveals the proportion of your total income that will go towards servicing your
EMI for the new home loan and other payment obligations like house rent,
existing EMIs, insurance premiums, etc.
While some lenders use
your net monthly income to calculate this ratio, others consider gross monthly
income. As lenders prefer this ratio to be within 40-50 per cent, exceeding
this may lead the lender to either increase your loan term or decrease your LTV
ratio.
While a high LTV may be
good for you, it runs the risk of pushing up your borrowing rate. As higher LTV
ratio involves higher credit risk for lenders, they try to hedge risk by
charging higher interest rate for such loans.
Usually, housing loans
with LTV ratios of 80% or less are offered the best interest rates.
However, in line with
the government’s focus on affordable housing, many lenders have started
charging lower interest rates for loans below ₹30 lakh, though the maximum LTV
here can touch 90%. The list includes almost all major home loan lenders like
SBI, HDFC, ICICI Bank, Axis Bank and Indiabulls Home Loans.
The difference between
the lower limit of interest rates for loans up to Rs. 30 lakh and those between
Rs. 30 and Rs. 75 lakh can be as high as 30 basis points.
Thus, if your loan
amount crosses Rs. 30 lakh by a few lakhs, increase your own contribution to
bring the loan amount within Rs. 30 lakh. This could reduce your interest cost.
About the author..
The writer is CEO and
Co-Founder, Paisabazaar.com
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