How To Calculate Loan to Value (LTV) Ratio

If there is any ratio that will determine your eligibility for a loan, it is the LTV Ratio. The charges for the loan and any accompanying processing fees and other fees are also determined by the LTV ratio. The value of the LTV ratio will also determine whether you have to pay insurance towards mortgage. The following steps will help calculate the Loan to Value LTV Ratio.

First, decide whether you are going to buy real estate property, a new car, a truck or a business or any other item for which you require a loan. Once this decision is taken, calculate the LTV ratio by following the instructions listed below:

Real Estate: Get to know the market value of the property you intend to purchase. The market value can be determined by:

  • Calling up property sellers in the same area for other similar properties, OR
  • By checking on the internet on real estate web sites, OR
  • Looking up daily newspapers that have columns dedicated to market value of properties

Next, determine the value of the property. The loan company or institution will usually have a recommended panel of appraisers. Choose an appraiser from this approved panel, to get the property appraised. The appraiser will value the property based on current market conditions and also by determining impact of market conditions in the future or over the loan tenure. In any case, initially the loan company may give you an approximate value and get the same reassessed by a professional person before deciding on the actual value.

For the purpose of calculating LTV, the lower of the two values (market or appraised) will be used. Based on whether you are employed or in business, the loan giver will objectively assess your earnings, existing liabilities, current assets, your expenses and your repayment capacity and determine the maximum loan amount that you are eligible for.

The loan amount that you will be finally approved for, will be equal to or less than the approved value (market or appraised whichever is lower) and proportional to your current and future repayment capacity.

Divide the loan amount approved by the loan giver by the lower of the market or appraised value to get the LTV Ratio. If the LTV ratio is 1 then you get 100% value of property as loan. If the LTV ratio is 0.5, you get 50% value of property as loan and the balance 50% will be your down payment.

Car loan: Decide on the car that you intend to purchase. If the car company and the loan giver are different,

  • Get a quotation from the car company for the value of the car you intend buying
  • Submit the quote to the loan giver along with details about your earnings

Divide the approved loan value by the value of the car to get the LTV ratio. This formula can also be used to calculate LTV for commercial vehicles such as trucks, cabs, etc, should you be interested in a commercial vehicle loan.

The LTV ratio can be calculated for purchase of any item by following the steps detailed above. So get a better grip on your finances, now that you know what to do!


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