What is Debt-To-Service Ratio (DSR) and how does it affect your home loan?

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DSR and Home Loan

What does your dream home have to do with a debt-to-service ratio? So you finally found your dream home after months of searching all over. Now the only thing left for you to do is to apply for a home loan to finance your costs. Before you do that though, you need to know about something that banks look into whenever you apply for a loan.

What is Debt-To-Service Ratio?

DSR, also known as the debt-to-service ratio, is a calculation of a person’s total debt in relation to their household income. It is one of the methods used by banks in order to measure someone’s ability to settle their debts and consequently, whether the bank should lend to that person.

Other factors that banks take into account when deciding on lending money are:

  1. Your CTOS and CCRIS reports 
  2. A valuation of the property
  3. The maximum Loan-to-Value (LTV) ratio/Margin of Finance available to you

This article will be focusing solely on DSR.

How to calculate DSR

DSR may be calculated using the following formula:

Debt /Net Income X 100 = DSR

DebtAll financial obligations/commitments that need to be fulfilled, such as personal loans, student loans and credit card repayments.
Net incomeWhatever income you may make, after deductibles such as income tax and EPF payments.

 Note: In Malaysia, most banks accept a DSR within 70%.

Let’s show a simple DSR calculation by example

Let’s say you are a working individual with a total family monthly income of RM 10,000. After removing deductibles, let us say your family’s net income is approximately RM 8600.

In this case, in order to have a DSR ratio of 70%, your total debt must not exceed:

70/100 X RM 8600 = RM 6020

Now let us assume that you have other financial obligations such as a car loan, credit card payments and student loans.

Car loanRM 500
Credit card repaymentsRM 400
PTPTN LoanRM 100
Total financial obligationsRM 1000

In this case, your total debt threshold will go down further to:

RM6020 – RM1000 = RM5020

Therefore, you should check your financial situation before you start applying for a home loan, since your debts may limit your options.

How DSR may affect your home loan eligibility

If you are looking to buy a home in Malaysia, your DSR should generally be within 70%. Most banks generally have different DSR levels that they are willing to accept. Some will only accept a loan application if the DSR is significantly lower than 70%. We will go into more detail on this matter further below.

Banks use DSR to decide on how much of someone’s income is used for loan payment and other forms of debt. This, in turn, helps them figure out if a person can take up the housing loan they are applying for.

Banks always prefer persons with low DSR because it indicates that you are most likely able to pay your installments on time and that there is a lower risk of default.

A Bank’s Debt-To-Service Ratio

Every bank uses its own calculation methods for income and commitment recognition. It is quite common to have two banks come up with a different DSR value for a person, sometimes with a difference of up to 20%. What’s more, every bank has different guidelines for the maximum allowable DSR threshold. They are normally affected by income level and even factors such as qualifications and age. Let us take a few examples:

Example 1Standard Chartered Bank may base their calculations on Gross Income, while RHB and Maybank base it on Net Income.
Example 2CIMB and HSBC may recognize 100% of a person’s rental income, while OCBC and Public Bank only recognize 80%.
Example 3Hong Leong considers 100% of a customer’s foreign-derived income, while RHB recognizes only 45%.

When you apply for a home loan, if you do happen to be rejected from a bank, don’t despair. Try other banks. If you still fail after a few tries, then give the application process some breathing room, pay off some of your outstanding debts, and then try again.

We hope that you found this article helpful and that you can now make better, more informed decisions when you go to apply for a home loan.

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