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Loan to Value (LTV Ratio) or Loan to Cost (LTC) Ratio - YouTube
Channel: Asset Yogi
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to watch first the latest finance videos
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Namaskar, my name is Mukul and welcome to the Asset Yogi
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where we do not lock rather unlock the knowledge of finance
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Whenever you go for a loan
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suppose for any home loan or car loan
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or suppose you want to take a loan for a project
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you want to set up a factory
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or a plant
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If you want to take a loan for that purpose
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then you must have noticed, you do not get a 100% loan
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This loan actually depends on LTV or loan to value ratio
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In the project's case, we also call it loan to cost ratio.
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So what is the formula of loan to value or loan to cost ratio?
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How are they calculated?
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And how you'll get the maximum LTV?
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Suppose 70%, 80% or 90%
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how is this calculated?
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In this video, we will learn about all these things in detail
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so stay tuned to this video till the end
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let's get straight to the blackboard
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LTV full form is a loan to value ratio
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LTC full form is a loan to cost ratio
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Both have the same meaning
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Let's understand this with an example
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Suppose you want to buy a home
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whose cost is 50 lakh rupees
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So, suppose you do not have 50 lakhs in cash
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so you would want a home loan
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So how much maximum home loan can you get?
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It will depend on the loan to value or loan to cost ratio.
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So what is the formula of loan to value?
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The loan to value formula is
the loan amount...
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divided by asset value
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So it means if we are talking about the home here
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so here the asset value is the property value i.e. 50 lakh rupees.
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And how much loan amount will you get?
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Will be calculated here
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And how much maximum amount of loan to value ratio can the bank give you?
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Will be calculated here.
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In the same way, suppose any company does a project
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So what will be the loan to value ratio?
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Loan amount divided by project cost
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So from the loan to value ratio, we get to know
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that how much maximum loan amount will we get, right?
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So the bank says we will give the maximum loan of let's say 80%
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So they say we can give the maximum loan of up to 80%
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so the maximum loan to value ratio is 80%
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And in some cases, this goes to a maximum of 90%
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So we will also see in which cases it goes up to 90%
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you will see in the maximum cases that
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whether it is a home loan, car loan, bold loan
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or you want to take a loan for a project
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generally, banks give loans only up to 80%
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either of the project cost or the asset value
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So suppose you want to calculate the loan amount from this
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So, what we will do?
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Loan amount =
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suppose you can get a loan of up to 80%
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Suppose the loan to value ratio is 80% of any bank
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so you'll multiply it with 80% * asset value
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Now, suppose the asset value, in this case, is 50 lakh rupees, then
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You'll do 0.8 * 50
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so you will get this value of 40 lakh
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So this much maximum loan you can get
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And for the rest 10 lakhs, you have to do the downpayment
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And this amount of downpayment of 10 lakh rupees
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this you have to arrange with your own sources
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They can be your savings
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or you sell your other asset
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and get this Rs.10 lakhs from there
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So this is your downpayment, but you'll get the maximum loan of Rs.40 lakhs only
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Similarly, let's take an example for the project cost as well
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Suppose there's a project cost whose value os let's say Rs.10 crores
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Some company wants to set up a plant of 10 crores
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or a factory
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So in that case,
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how much loan amount will it get?
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suppose we take 80%
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if the LTV ratio is 80%
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So we will multiply by 0.8 * 10 crores
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So, in this case, we will get a loan of up to 8 crores
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And the rest of the 2 crores, the company has to arrange with its own sources
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So, in this way, how much maxium loan amount can we get?
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That we can claculate by the LTV ratio
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And this LTV ratio
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of 80% or 90%
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every bank decided it with its risk profile
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What kind of people can I give up to 80%?
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What kind of people can I give up to 70%
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What kind of people can I give up to 90%?
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So every bank make its separate risk profile
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We will also see the parameters of the risk that it covers
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So now, as we talked about the home loan
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So, in the same way,
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you can calculate your loan amount for loan against the property
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there's also an LTV ratio for that
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For car loans also this LTV ratio is applicable
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If you want to take a gold loan
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there's also an LTV ratio for that
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Also, as we talked about the project financing here
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there it becomes LTC i.e. the loan to cost ratio.
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So LTV and LTC means the same
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that whatever is the total value, 70% or 80%
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of the project or asset
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you'll get the loan for that amount
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You'll get the loan of the per cent equal to its LTV
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So, in this way, we calculate our loan amount
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Now it comes to the risk profile
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let's talk about this too
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So the very first point is
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The higher the LTB, the higher will be the bank's risk
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Now what the bank says is I am giving the loan of 80% only because
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suppose the value of this house decreases from 50 lakhs to only 40 lakhs
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suppose it decreases from 50 lakhs to only 40 lakhs
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So at least he can sell the house at 40 lakhs
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can repay
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can recover his loan, right
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In the same way
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in the project also, suppose
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If he has to takeober the project, he can sell it to another company also
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he can cover his money by selling it off to the factory
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That is why this margin of 20% is kept
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Suppose in the same case, if he had given the loan of 90%
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And suppose this house would have sold for only Rs 40 lakh.
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So the bank had to bear the loss of 5 lakhs
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Because of this, the higher the LTV
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the higher will be the bank's risk
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and in that case, the interest rate also rises
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because the bank
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to such customers, it is giving higher LTV
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Charges a bit more interest rates on them
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So, we will also see in bit more detail about that.
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After that, lower LTV protects the bank against devaluation and default risk
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So, as we talked here, if the property or the asset's price fell down
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So, against that risk, the lower the LTV, the higher the benefit
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Suppose someone has taken only a 70% loan
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Suppose, in this case only, 70% loan means
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he has taken a loan for 35 lakhs only
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So the bank has a sufficient margin of 15 lakhs
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even if the value of this house fall down to 35 lakhs
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then also the bank is safe.
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Now, the second point is, how can you get the higher LTV ratio?
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As a customer pr as a consumer
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how can you get a higher LTV?
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Suppose if you want to get 90% LTV
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And in this case, you want to take a loan of up to 45 lakhs
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so the very first thing, your credit score should be very nice
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your CIBIL score should be 750+
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Second, you get it for a lesser loan amount
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So according to the RBI's instruction
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the loans less than 35 lakhs
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there you get a home loan of up to 90%,
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the LTV is considered 90% there
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After that,
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loan amount of any individual
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according to the income of that individual
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if he has taken a very big loan amount
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then the bank will not give him a high LtB ratio
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It will be given less only
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So there also the LTB is considered
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If you have taken up so many loans
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if your credit card debt is very high
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according to the income.
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Then also you'll get less loan.
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Second is the factor of age
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Suppose if a person of 25 years apply for a loan
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then there are chances
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that he can get an LTB of up to 90%
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But if someone is of 55 years
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then it's very difficult for him to get the LTV about 80%
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Because there the age of serving the loan
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here young people are benefitted a bit
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because they have a long time period
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But if there's a person of 50-55 years, then
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he'll be retired very soon
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he has very little time to repay the loan.
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That's why there are very few chances that he can get an LTB of more than 80%
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In fact, he may get very less loan amount because
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his service of only 5 years will be considered
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Then one point is, in which cases do you get lower LTB ratios?
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Generally, if your credit score is very bad
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Suppose, you've taken up so many loans
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and you want to take a big loan amount
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So, even today, if you take a loan of more than 75 lakhs
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then you'll get a loan to value ratio of a maximum of 75% only.
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So, in this way, the loan to value ratio also depends on the loan amount
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also, if you've done very late loan repayments
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you haven't repaid on time
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then your LTV ratio can decrease
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Suppose your income is low and
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paying capacity is low
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then you may get less LTV ratio
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And suppose your loan exposure is very high as compared to the income
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then also you'll get a low LTV ratio only
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Then , another point comes,
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in the home loan,
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when you are calculating this value of 50 lakhs
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so in this 50 lakhs
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can add stamp duty and registration charges
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when the loan to value ratio is calculated.
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So suppose, 5 lakh rupees is the stamp duty and registration charges
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Then you can consider your asset value as 55 lakhs
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most of the banks and financial institutions include it nowadays
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So do keep this thing also in mind that
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if you want to take a high loan amount
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then you can include stamp duty and registration charges as well
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Then lastly, a higher LTV ratio may increase the interest rate
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So suppose, if you take up an LTV of 80%
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Then you may get lowest interest rate
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so suppose, if the interest rate of a home loan is at 8.25%
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then you can easily get the lowest interest rate
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up to 80%
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But suppose, if you want to take maximum LTB
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If you want to consider 90% LTB
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Then the bank may charge you the interest rate of 8.5%
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So the interest rates also rise in the case of high LTV
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So I think I have covered all the major points related to LTV
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that how the LTV is calculated?
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How much maximum loan amount can you get?
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And what are the rises that the bank assesses
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while considering the LTV
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Till then keep learning, keep earning and be happy.
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