A larger margin of money reduces an individual’s flexibility by tying up more upfront costs initially. However, it reduces their EMI amount and loan burden.
LTV Ratio vs Margin Money: Differences and Impact on Loans
LTV Ratio vs Margin Money: Key Differences and Their Impact on Loans
When it comes to securing a home loan, understanding financial concepts such as LTV ratio vs margin money is crucial. These concepts significantly impact your borrowing capacity, interest rates, and overall financial commitment.
By understanding how LTV and margin money interact, you can make informed decisions that lead to a smoother home-buying experience. Read further to know more about the dynamics of these two concepts and help you make well-informed decisions.
What is the Loan to Value Ratio?
LTV (Loan-to-Value) ratio is a financial term that shows how much a lender is willing to finance against the value of the asset or property being used as collateral. For example, if you want a loan to buy a house worth ₹1 Lakh and the lender is willing to give you a loan of ₹80,000, your LTV ratio would be 80%. Higher LTV ratios usually mean higher interest rates and more stringent loan terms.
What is Margin Money in Home Loans?
Margin money in home loans is the initial deposit or down payment you make towards the total cost of the property. You pay the money from your funds, while the rest is covered by the home loan. Depending on the internal policies of a lender, you may need to pay 20% of the property’s value as margin money.
LTV Ratio Vs. Margin Money: Key Differences
The differences between LTV ratio and margin money are listed below in a table:
Points of Distinction |
LTV Ratio |
Margin Money |
Definition |
Percentage of the asset’s value that the lender is willing to finance. | The borrower needs to contribute a portion upfront towards the purchase of the property or asset being financed. |
Purpose |
Helps the lender assess risk. A higher LTV requires the lender to finance a larger portion of the asset, indicating a higher risk for lenders. | Reduces lending risk by making the borrower responsible for a part of the asset’s cost. It also ensures that the borrower has some financial stake in the asset. |
Calculation |
The principal loan amount is divided by the market value of the property and is expressed in percentage. (LTV Ratio Calculator) | The remaining portion of the asset’s value that the borrower pays after deducting the principal amount. (Margin Money Calculator) |
Risk assessment |
A higher LTV ratio indicates higher lending risk as the borrower relies solely on the loan to finance the property or asset. On the other hand, a lower LTV ratio is preferable for risk reduction. | A higher margin money (more like a higher down payment) reduces lending risk as the borrower contributes more money upfront from his funds. The lender finances the remaining cost of the property. |
Role of the borrower |
If you want to borrow a larger portion of the asset’s value, a higher LTV ratio is favourable. It also minimises upfront costs. | By providing margin money, the upfront costs and financial responsibility for the asset increases. |
Impact on loan |
A lower LTV can help you get favourable loan terms including lower interest rates. On the other hand, lenders may offer you higher interest rates with a higher LTV, as it increases their risk of lending. | Contributing more margin money requires you to borrow less. This may result in lower EMIs and interest payments over time, letting you pay comfortably without defaults. |
Regulatory authorities |
The LTV ratio offered by banks and financial institutions in India is regulated by RBI (Reserve Bank of India). It serves as the maximum limit a financial institution can offer. | Lenders decide the margin money a borrower needs to pay, based on their internal policies. |
Loan approval |
Higher LTVs of up to % can narrow down the chances of approval, as the ratio increases lending risk | Larger margin money demonstrates the borrower’s financial commitment and reduces the lender’s exposure to risk. This increases your chances of getting approved for the home loan. |
Financial flexibility |
Opting for a high LTV offers the borrower greater flexibility by eliminating the need to pay high upfront costs. However, it increases their obligation towards loan repayment. |
|
Example |
If the value of a property is ₹10 Lakh, and a financial institution offers to finance 70%, the LTV ratio is 70%. | If for the ₹10 Lakh property, the financial institution finances 70%, the borrower pays the remaining 30% (₹3 Lakh) as margin money. |
Impact of Loan-to-Value Ratio on Home Loans
The loan-to-value ratio helps in determining various aspects of a home loan in the following way:
- Interest Rates: A high LTV ratio above 80% increases lending risk, making you eligible for higher interest rates. On the other hand, lower LTV enables borrowers to have more equity in the property, reducing lending risk. This leads to lower interest rates.
- Loan Amount Approval: When the LTV ratio is high, it demonstrates that the borrower is seeking a larger loan relative to the property’s value. As a result, lenders take on more risk financing a larger portion, which can narrow down approval chances. However, a low LTV allows lenders to approve your application quickly at favorable terms.
- Repayment Tenure: You may be offered a shorter repayment tenure with a higher LTV to mitigate risk. Conversely, a lower LTV qualifies you for more flexible repayment options.
- Down Payment: If the LTV ratio is 80%, as a borrower you are only required to cover the rest of 20%. On the other hand, a lower LTV ratio requires borrowers to contribute more upfront.
- Eligibility Criteria: Eligibility criteria can be stricter for an individual seeking higher LTV loans. A lower LTV ratio comes with less stringent eligibility requirements due to less lending risk.
Impact of Margin Money on Home Loans
The following points highlight the impact of margin money in home loans:
- Down Payment: A higher margin of money reduces the overall principal amount, resulting in lower EMIs.
- Repayment Terms: You may be offered flexible tenures and favourable repayment terms by making a larger contribution upfront.
- Interest Costs: Contributing a higher margin money leads to lower interest rates and vice versa.
- Lender’s Risk: A higher margin money is perceived favourably by lenders, as it reduces risk. This can lead to better interest rates and terms.
Read More: What is FOIR and How It Affects Your Loan Approval
Conclusion
Understanding the dynamics of LTV ratio vs margin money plays a vital role in shaping your home loan journey. By balancing these elements, you can secure favourable loan terms, reduce risk, and ensure a more manageable repayment plan. Make informed choices to optimise your financial future – reach out to Kogta Finance today!
