Maximum Loan to Value Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 2209
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Definition: Maximum Loan to Value Ratio

Loan to Value(LTV) is an important risk assessment to assess the borrowers credibility before taking a mortgage.


The mathematical value LVT comes out as

LVT = Mortgage Amount/ Appraised value of the property.


Thus maximum LVT is the upper limit to the risk measurement. For example if A is purchasing a house of worth Rs 1,00,000 for which he needs to borrow Rs 80,000. Thus the LVT ratio yields a percentage of 80%. Generally as a limit of safety bankers do not approve a loan against a LVT of 75%. Hence in this case A ‘s loan is a risky loan and presumably the bank will not approve it. Thus Maximum LVT will be 75% that is bank will allow only Rs 75,000 as loan.


For any lender the most important criteria is the risk of default. So, as the amount of LVT goes up , the greater is the debt on the part of the borrower and hence the greater risk of default. This implies as the LVT goes up the risk also increases and lenders requires borrowers to buy mortgage insurances to their loans. Banks thus select customers with high LVT if they have high credit scores and satisfactory mortgage history. Sometime the banks also allows borrowers with LVT as 100 % but those cases are very rare and select for most credit worthy borrowers.

 

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