Loan to Value in LAS: What You Must Know Before Borrowing

When you urgently need cash but prefer not to liquidate your investments, Loans Against Securities (LAS) can be your best solution. In simple terms, LAS allows you to borrow money against your existing investments like shares, bonds, or mutual funds.

One crucial factor you must understand when opting for LAS is the Loan to Value (LTV) ratio. Knowing your LTV helps you determine exactly how much loan you can expect against your investments, making your financial planning clearer and simpler.

What is Loan to Value in LAS?

Understanding Loan to Value (LTV) is fundamental before you borrow against securities, as it directly influences your borrowing potential.

Meaning of Loan to Value (LTV)

Loan to Value (LTV) is essentially the percentage of the market value of your securities that a lender offers as a loan. 

For instance, if you have mutual funds worth ₹5 lakh, and the lender provides an LTV of 60%, you can borrow up to ₹3 lakh. 

The LTV ratio varies based on the type of security and the lender’s policies.

Why does LTV matter to you?

The LTV directly determines your borrowing capacity and affects your financial planning. A higher LTV means greater loan availability, enabling you to meet larger financial needs without selling your valuable investments. 

Conversely, a lower LTV restricts your borrowing capacity, which could be inadequate during financial emergencies.

Terms that influence your loan amount

Several factors influence your LTV:

• Type of security: Mutual funds, stocks, and bonds typically have different LTV percentages.
• Market volatility: High volatility can lower your LTV.
• Lender’s internal policies: Different lenders have varying guidelines that impact your available loan amount.

How is LTV calculated in LAS?

Calculating LTV accurately helps in understanding how much funding you can receive, aiding your financial decisions significantly.

Basic formula to know

LTV is calculated using the simple formula:

LTV= (Loan Amount / Market Value of Securities) x 100

For example, if your securities' current market value is ₹10 lakh and your lender offers ₹6 lakh, your LTV ratio is 60%.

Role of securities type and value

The type and stability of your securities directly influence your LTV. Generally, government bonds and debt funds get higher LTV because they’re less volatile compared to equity investments.

For instance, debt funds might attract an LTV of up to 80%, while equity funds could typically receive around 50% to 60%.

High LTV vs Low LTV in LAS

A high LTV allows you to maximize your borrowing potential, beneficial during significant financial needs. Conversely, a low LTV reduces the risk of margin calls (situations when your lender requires additional security or repayment due to a fall in your asset value). 

Balancing these aspects ensures you borrow wisely, maintaining financial stability.

How can you get a high LTV in LAS?

Maximizing your Loan to Value ratio can significantly enhance your borrowing potential. Here’s how you can achieve a high LTV:

Choose eligible high-value securities

Select securities that lenders value highly, such as government bonds, debt funds, or blue-chip stocks. For instance, if you have ₹5 lakh in debt funds, you may easily get an LTV of up to 80%, allowing you to borrow ₹4 lakh comfortably.

Maintain good credit and investment history

A solid credit history and consistent investment track record enhance your credibility with lenders. 

Regularly investing and responsibly managing your finances signal reliability, prompting lenders to offer a higher LTV.

Compare lenders and their LTV limits

Different lenders have varying LTV policies. Compare and choose lenders that offer favorable LTV ratios. For example, some NBFCs may offer 70% LTV on mutual funds, while others might limit this to 60%.

What are the risks of low LTV in LAS?

Understanding the downsides of a low LTV can help you prepare better and avoid financial pitfalls.

Reduced loan eligibility

A lower LTV restricts how much you can borrow, limiting your financial flexibility during emergencies. For example, if your securities are valued at ₹10 lakh but the lender provides only a 40% LTV, your maximum loan amount would be ₹4 lakh, which might not meet your needs.

Margin call and top-up triggers

Low LTV ratios increase the risk of margin calls. If your security value drops significantly, the lender may ask you to deposit additional funds or securities. For instance, if your security value falls by 20%, you might need to provide more collateral immediately.

How to avoid low LTV pitfalls

• Regularly review your investment portfolio
• Diversify across different asset classes
• Stay informed about lender policies

Conclusion

Understanding Loan to Value (LTV) is essential when borrowing against your securities. Knowing how LTV works, the factors influencing it, and the risks of low LTV helps you manage your finances effectively. 

At Quicklend, we simplify the complexities of LAS so you can borrow smarter, not harder.

This is general guidance. For personalized loan advice, contact our advisors.