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Higher LTV Ratio Means Affordable Homes?

The central bank has increased the LTV for housing loans to 90% for borrowers whose property value is not more than Rs 30 lakh

If falling interest rates and bank festive home loan schemes were not good enough reasons for you to take a home loan, the Reserve Bank of India has made an announcement recently that could make borrowers ecstatic. As per the new announcement, the central bank has increased the Loan-To-Value ratio (LTV) for housing loans to 90% for borrowers whose property value is not more than Rs 30 lakh.

Earlier, this privilege was enjoyed by loan takers whose property value was less than Rs 20 lakh. However, with real estate prices not dipping, this policy was not aiding borrowers much, as even the properties in the affordable home segment cost more than Rs 20 lakh.

Understanding LTV and its role in home loans

LTV is the maximum amount one can borrow for home loan against the actual property value. Banks have their own inhouse team that assesses the actual market price of the property to decide the maximum loan that can be offered against it. Banks will also consider your ability to repay the loan as per your income documents, credit score and other parameters, while deciding the loan amount that can be granted.

The RBI announces guidelines for banks from time to time for determining the LTV for various home loans. Currently, if you want to take a home loan for a property up to Rs 30 lakh, you can get a maximum of 90% of the property cost as loan, i.e. Rs 27 lakh. This is subject to your individual eligibility for this amount, based on your income.

For properties priced above Rs 30 lakh and above, the maximum LTV is 80%.

Does higher LTV make homes more affordable?

LTV does not have anything to do with home loan affordability, though a higher LTV does bring a previously unviable property purchase within your reach.

Taking a loan of Rs 27 lakh at 90% LTV, instead of Rs 24 lakh at 80% LTV, for a 30 lakh property may well make it easier to mobilise the down payment, but the lesser you borrow from the bank, the lesser you end up paying as interest for your home loan. A higher quantum of loan equates to a higher EMI.

Eligibility norms remain unchanged

The RBI may have eased the LTV ratio, but the eligibility norms for the home loans remain unchanged. This means you will still need to have a good financial track record and decent monthly earnings to show before the bank consider you eligible for a home loan.

Higher quantum loans still difficult to get

The rising cost of real estate means house prices are on the rise, or are stagnant at best. In metropolitan cities you may hardly find any housing project below Rs 30 lakh. For a higher quantum of loan the LTV remains the same, which means you still will have to pay more from your own pocket as down payment, to get a home loan.

Other charges that you must be aware of when buying a home

While LTV is an essential aspect of a home loan, it is not the end of the affordability story. There are many other expenses that you will have to service from your own pocket. These can considerably stretches the budget of average middle-class homebuyers. These expenses include:

  • Stamp duty and registration charges: Bank home loans do not offer any funding for stamp duty and registration charges. Stamp duty rates vary from 4% to 10%, depending on the location of the property, and therefore, comprise a significant portion of your cost of property ownership.
  • Society fees: If you are buying an apartment or a house within a gated residential community, usually one-time society charges or advance maintenance charges are applicable. This amount varies with the community and location and can even run into a few lakh.
  • Insurance and taxes: Any money you spend on your home insurance or towards property tax payment must be taken care of by you individually as these are excluded from home loan. However, home loan insurance is one product which home loan lenders offer along with the core product, in which case it will be added to your loan outstanding and the EMI would be enhanced accordingly.
  • Interior designing: Home loans are not provided for interior decoration, which includes electrical fixtures, wooden flooring, kitchen cabinetry, furniture etc. Doing up interiors can cost a small fortune depending on the choices you make.

An increase in LTV for homes up to Rs 30 lakh is a step in the right direction, offering a real incentive for property purchasers seeking to minimise their initial down payment.

Written By: Adhil Shetty

Posted by The Finapolis

Wednesday, December 09, 2015 4:34:00 PM

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