The term “Loan to Value” is mostly used in home loan transactions that means the ratio of amount that you wish to borrow for home to the actual value of home. LTV (Loan To Value) generally is difference of actual worth of home and the down payment which is made towards the same home.
For example: the value of a house is Rs. 40,00,000/- and a down payment of Rs. 400,000/- has been made a loan of the balance amount that is Rs. 36,00,000/- is being sought. In this case the LTV comes to be Rs. 36,00,000/- of the actual value of Rs. 40,00,000/- which works out to 90%. Thus the LTV is 90%.
Few financial institutions include stamp duty, registration and other documentation and legal charges in the cost of the house property and then arrive to LTV which eventually increase the loan amount and speculator get benefits the most to play in real estate market.
On the issue of LTV the RBI has made the following statement on February 03, 2012 vide their circular “RBI/2011-12/383 DBOD.No.BP.BC. 78 /08.12.001/2011-12” – “In this connection, it has been brought to our notice that banks adopt different practices for deciding the value of the house property while sanctioning housing loans. Some banks include stamp duty, registration and other documentation charges in the cost of the house property. This overstates the realisable value of the property as stamp duty, registration and other documentation charges are not realisable and consequently the margin stipulated gets diluted. Accordingly, banks should not include these charges in the cost of the housing property they finance so that the effectiveness of LTV norms is not diluted.”
Stamp duty, Registration, documentation and other charges like- services tax, VAT ect, themselves come around 20% to 25% of home value. All this charges were includes in the home loan valuation and then 80% of that amount is been finance by banks generally but as per new rules the contribution from borrower will increase with the same amount of stamp duty, documentation charges, and other charges.
Ground of New Rule from RBI:
There are two primarily reason for which RBI has taken such decisions.
- This will discourage the speculation in real estate market and people will use home loan facility to build own residential house and not for investment.
- RBI wants to keep lending market protected in case of a surge of defaulters and delinquency. This will ensure that people that are capable enough to repay the loan only enjoy the facility. And in turn in case of any default also bank will be in position to recover the lower amount of loan.