This article was updated on 24 February 2020.
Thinking about applying for a home loan to finance that property you have your eye on? Careful, different banks have different debt-to-service ratio (DSR) thresholds, so it is important that you research first to avoid getting rejected.
What is DSR?
The debt-to-service ratio, also known as DSR is the ratio of a person’s total debt to their household income. It measures the ability of a person to settle their debt obligations. Your DSR is one of the three main components of your risk profile; which is a key factor that banks use to determine your borrowing power.
The other two components are your CTOS and CCRIS reports. Other factors that banks take into account is the valuation of the property that you are looking at as well as the maximum Loan-to-Value (LTV) ratio/Margin of Finance available to you. However, in this article, we will be focusing solely on the DSR.
How Will DSR Affect My Home Loan Eligibility?
If you’re looking to purchase a home in Malaysia, your DSR should generally not exceed 70%. Some banks even require DSRs of an even lower percentage, but that will be explained further below. Banks use your DSR to determine how much of your income is used to pay off loans and other debt obligations and whether you can afford to take up the housing loan you’re applying for.
A low DSR is attractive to a bank as it indicates that you will be able to pay your monthly instalments on time and there is a lower risk of you defaulting.
Unfortunately, many Malaysians are unsuccessful in their applications for housing loans as they were not aware that their personal DSR is often higher than the maximum DSR amount accepted by that certain bank.
In fact, loan approval rates for property purchases declined slightly to 71.3% in 2018.
How to Calculate DSR?
As stated earlier, DSR is the ratio of total debt to household income. The formula for DSR is as follows:
DSR = Debt/Net Income X 100
Debt is taken to mean all financial obligations such as personal loans, student loans (eg. PTPTN) and credit card repayments.
Net income meanwhile, refers to whatever income an individual has left after deductibles such as income tax and EPF payments are taken into account. Most banks in Malaysia accept a maximum DSR of about 65-70%, therefore, it is essential that you learn to calculate your DSR before you buy a property and apply for a home loan.
For instance, let’s assume that you are a 25-35 year old working individual or a couple living in Selangor with a monthly household income of RM5,000. After removing income tax as well as EPF and SOCSO payments, your net income would be approximately RM4,300.
Therefore, in order to have a DSR ratio of 70%, the total debt of your household cannot exceed RM3,010.
70%/100% X RM 4300 = RM 3010.
Let us assume you have the following financial obligations – These figures are loosely based estimates of the average millennial living in Selangor.
- Car loan: RM500
- Credit card repayments: RM400
- PTPTN Loan: RM100.
Other Financial Obligations = RM 1000
Hence, the maximum amount that you can spend on paying monthly instalments on a home loan is RM2,010.
Total Financial Obligations – Other Obligations = RM3,010 – RM1,000 = RM2,010
Given that you can only afford RM2,010 a month on housing loan instalments, it is important that you search for a property that is within your budget range. An expensive property would mean that you wouldn’t be able to afford the monthly instalments and banks would most likely reject your loan applications.
If you’re not sure on how to calculate your DSR on your own, check out LoanCare, which will compare your customised home loan eligibility from up to 17 banks in Malaysia.
What is a Bank’s DSR?
So now that you’re familiar with DSR and you know how to calculate it, let’s take a look at the maximum DSR accepted based on a few Malaysian banks. Across banks, there can be significant differences in the final calculated DSR amount.
This is because every bank has its respective calculation methods for income and commitment recognition. It is quite common that when different banks calculate the DSR for the same person, there can be DSR differences of up to 20%!
But the differences do not stop there. Once the DSR has been determined, every bank will have their respective guidelines for the maximum allowable DSR threshold. It is typically determined by income level, but may also be affected by net worth and even factors as arbitrary as qualifications and age.
Below are a few examples:
Example 1: Standard Chartered Bank may base their calculations on Gross Income, while RHB and Maybank may base it on Net Income.
Example 2: CIMB and HSBC may recognize 100% of rental income, while Public Bank and OCBC may only recognize 80%.
Example 3: RHB recognizes only 45% of foreign-derived income, while Hong Leong considers 100% of it.
It is vital that you research a bank’s DSR cap before applying for a home loan, because if your application is rejected by one bank, other banks will know about it through your CCRIS record. CCRIS displays your credit behaviour, as well as any loan rejections you might have in the past 3-6 months. Hence, not getting bank loan approval from one bank can set you back 3-6 months in applying for another.
It is also prudent to minimise your chances of rejection by applying at banks with the highest chances of approving your loan. For instance, if your DSR is 65%, you should apply to banks whose DSR caps are at 65% or higher. Remember that it is extremely important for you to do your research before applying for a home loan as there are many different factors that could affect your chances.
Best of all, it will give you a clear idea of what to expect from each bank, such as the bank’s accepted DSR and the maximum home loan amount you are eligible for. Also, check out our Beginner’s guide to Islamic home financing in Malaysia.
Edited by Reena Kaur Bhatt