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Business Hack #2: Unlock Maximum Value with Loan to Value Ratio

Tanya and Rupa are discussing Tanya’s plan to expand her business. Since Rupa is financial advisor, she explains the benefits of opting for a Loan Against Property to a still hesitant Tanya.

Tanya: I don’t know, Rupa, Loan Against Property is too risky, isn’t it? This ancestral property is all I have as my security!

Rupa: Tanya, that’s a myth. In fact, Loan Against Property is a secured loan option. Plus, it comes with multiple benefits for young entrepreneurs like you.

Tanya: Like what? I mean, I need funding for my business, and at this point, I don’t want more overheads.

Rupa: Okay, let me start with a fun fact to cheer you up. Did you know Loan Against Property is relatively cheaper than a personal loan? The interest rates are lower, and the repayment tenure is high!

Tanya: Oh, tell me more! Rupa: Well, if you put up a property as collateral, you don’t have to vacate the place. You can continue using the property while paying the EMI on time.

Tanya: Okay, so how is Loan Against Property’s funding calculated?

Rupa: With the help of LTV Ratio.

Tanya: What is LTV Ratio?


Does starting your own business or expanding it leave you with questions as Tanya?! Well, don’t worry! We are here to help you unlock maximum value for your business with our article on Loan to Value.

Read on.

What is LTV?

In Loan Against Property, the Loan to Value Ratio (LTV) means ‘How much of the property’s market price is being paid by your lender?’.

Explaining the concept, LTV is the maximum amount offered based on the current market value and liquidity of the asset offered as collateral. In other words, LTV is the ratio of the property’s value and the loan sanctioned against it. This is one of the most important metrics a lender considers to evaluate the risk associated with sanctioning a Loan Against Property.

Usually, the loan-to-value ratio in a Loan Against Property typically falls between 40 and 75 percent of the mortgaged property’s market value as established by the lender. However many lenders, like Godrej Capital, offer 80% LTV. This sum enables you to choose the loan amount you want to take out and calculate your monthly EMIs using a loan against property EMI calculator.

How is LTV Calculated?
An LTV Ratio is determined by the amount borrowed divided by the property’s value, represented as a percentage. An LTV Ratio impacts the Loan Against Property Interest Rates majorly.

The formula for calculating the LTV ratio is:

LTV % = (Principal Amount / Market Value of the Property) * 10


For instance, Ramu urgently needs Rs. 30 lakhs to buy office equipment. He mortgages his property for the loan amount. The lender will check the property value and Ramu’s eligibility to receive the loan. If Ramu’s property’s market value is Rs. 40 Lakhs, the lender may decide to lend the required amount of Rs. 30 Lakhs. In this case, LTV will be calculated as: LTV % = (30 Lakhs / 40 lakhs) * 100.

Why is LTV important when applying for Loan Against Property?
LTV is extremely important when evaluating a loan against a property application because lenders look at the LTV ratio to assess how much risk they are willing to assume. Lenders believe that there is a greater risk of defaulting when borrowers request a loan in an amount that is at or close to the assessed value. This is due to the property having relatively little built-up equity. As a result, in the event of a foreclosure, the lender might have a hard time selling the house for enough money to pay off the remaining debt and still turn a profit.

Pro-Tip: Always mortgage a property that has a good market value. Keep the property papers free of issues like unclear property titles, ownership problems, etc.


Which is better - Higher or Lower LTV?

From the borrower’s perspective, higher LTV is lucrative as he/she receives maximum funding in the beginning, acquiring the desired amount for the objective for which the credit is taken, i.e. in this case a new business venture or expansion plan. Also, a higher LTV allows the borrower to negotiate for a lesser rate of interest and longer loan tenures.

Thus, at the time of opting for your lender, ensure that you negotiate well and opt for a higher LTV. Many lenders these days, such as Godrej Capital, offer LTV up to 90% on the property hypothecated. We also recommend due diligence to take into account other factors, such as post-sale service, flexible repayment plans, etc., while making the choice

Conclusion

So, what do you think is the most profitable catch as a borrower? Well, we leave the decision up to you! Loan Against Property product has benefitted many businesses. The quick funding, flexible repayment tenures, lower interest rates, and longer tenures make it an attractive option for business owners.

When deciding to opt for Loan Against Property, make sure to know about the nitty-gritty of loan Against property and meet the Loan Against Property eligibility criteria. Understand the different types of loan available. Read all the terms and conditions carefully and check for any hidden charges.

Godrej Capital through its subsidiaries, Godrej Housing Finance and Godrej Finance, offers products such as Home Loans, Loans Against Property, Balance Transfers, and many more. To know more about our offering, click here.

Disclaimer: The names used in this article are fictitious and are used for representational purposes only.

The contents of this article is for information purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its affiliates to any requirements. Godrej Capital or its affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

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