RBI allows 90% loan to value ratio on home loans up to Rs 30 lakh
Updated on March 7, 20194 mins read
In October 2015, a change was announced in the RBI home loan policy. This change was made to make buying a house in the affordable category easier. As per the changed guideline, the LTV ratio for home loans up till the value of Rs. 30 lakhs was raised to 90%. Prior to this change, a LTV of 90% was allowed for home loans for Rs. 20 lakhs or less. This move is likely to benefit those who are looking for buying a home with the help of a loan in the affordable segment (less than 30 lakhs) and will also provide a boost to the realty sector which is witnessing a slow down as more people will find it convenient to buy a house now. LTV Ratio Explained:LTV or Loan to Value Ratio refers to the proportion of the property value that the bank will extend to the borrower as a loan. Thus, a LTV ratio of 90% means that an amount of 90% of the property value can be taken as loan from the bank. This is the highest amount of loan that can be sought and a borrower can choose to take an amount lower than 90% of the house value to depending on his/her requirement and choice. So while the LTV ratio defined by the RBI sets the upper limit for a loan, the borrower has no compulsion to take a loan as high as that. A bigger loan means higher EMIs or a longer duration for the loan (if you find servicing a bigger EMI difficult) which ultimately adds to the cost of the loan. Borrowing more means you end up paying a larger amount as interest as the overall interest paid through the entire loan tenure depends on the principal, interest and loan tenure. A bigger loan means a bigger principal, thus the interest will be higher. Shikha, a resident of Dehradun has been working for five years and is looking at buying a house. The house she has shortlisted is valued at Rs. 25 lakhs Though she fulfills the eligibility criteria (she has a healthy credit score, a stable job etc), she has been postponing her decision for buying a house as she does not have sufficient amount saved to make a down payment. Now with the changed policy, she can get a loan up till an amount of Rs. 22.50 lakhs (90% of the cost of the house). Thus now Shikha can plan to buy a house with a down payment of Rs. 2.50 lakhs instead of Rs. 5 lakhs which she would have required prior to the policy change. How much she actually borrows will depend on a lot of other factors but this is the highest amount available to her as a loan. Impact of Change in RBI Loan Policy:So how is the change in policy by RBI impact an individual buying a house or planning to buy a house? This move by RBI is in line with the government agenda to provide housing for all and make buying a house it easier for those in lower income category. However, it is important to add here that this move is more likely to benefit buyers in non-metro cities as property prices in most metros continue to be high and finding a house below 30 lakhs in metros is a challenge. However, those who live on the outskirts of metros like Mumbai and Delhi could also benefit from this changed policy as buying a house in these areas would become easier with a bigger loan amount available.As we know when someone is looking at buying a house they need to have some amount saved which they pay as a down payment and the rest can be borrowed from a lender. This amount that the buyer pays as the down payment is an important factor in decision making when buying a house. A bigger down payment means lesser loan burden and lower interest cost but could stretch the borrower thin. You can read more about various factors that influence decision making when buying a house in an earlier post by us on this topic. So, Shikha can now buy a house if she has Rs. 2.50 lakhs for down payment and rest 22.50 lakhs she can borrow from a bank for a house worth Rs. 25 lakhs.Here it is important to remember that the LTV ratio is just one aspect. While as per the RBI Circulars on home loansyou can get a loan up till the 90% of the property value whether you are eligible or not for it is another matter. So, despite RBI allowing it, you may not get a loan of the desired amount if you do not have the eligibility for it. This has been discussed in detail in an earlier post on home loan eligibility. Thus, the LTV ratio as fixed by the RBI, the amount you have saved for the down payment along with your eligibility criteria together apart from a few other factors influence your buying choice. With the reduced LTV an individual’s borrowing capacity has increased making it easier for him/her to buy the house as lesser savings are required as long as the applicant meets the eligibility criteria set by the bank.
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