How to calculate Debt Service Ratio (DSR) & how does it affect my loan approval?

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This article was updated on 20 November 2020. 

Thinking about applying for a home loan to finance that property you have your eye on? Careful, different banks have different Debt Service Ratio (DSR) thresholds, so it is important that you research first to avoid getting rejected.

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Debt Service Ratio (DSR) Meaning

Debt Service Ratio, also known as DSR or referred to as debt ratio, 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 credit score or 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.

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How Will DSR Affect My Home Loan Approval?

If you’re looking to buy a house 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.

According to Housing Watch by Bank Negara Malaysia (BNM), loan approval rates for first-time home buyers declined slightly to 41% in March 2020, compared to 45% in 2019

CHECK OUT: Latest Base Rates, BLR & Lending Rates for various banks across Malaysia

How do you calculate Debt Service Ratio (DSR)?

Debt Service Ratio is calculated by taking an individual’s net income, which refers to whatever income an individual has left after deductibles such as income tax and EPF payments are taken into account, and then dividing it by the individual’s total monthly commitments including all financial obligations such as personal loans, car loans, student loans (eg. PTPTN), credit card bills and the home loan that the individual is applying for. The result is then multiplied by 100 to obtain the Debt Service Ratio (DSR) percentage. Simply put, the formula is as follows:

DSR = Debt/Net Income X 100

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 apply for a property loan.

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Let us look at a plausible scenario and 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 deducting income tax as well as EPF and SOCSO payments, your net income would be approximately RM4,530.

RM
Gross income 5,000
Deductions
EPF 450
Socso 19.75
Net income 4,530.25

Next, let us assume that you have a total monthly commitment of RM1,000 to pay off, in form of a car loan, credit card bills to pay, and a PTPTN student loan to serve. These figures are loosely based estimates of the average millennial living in Selangor.

RM
Net income 4,530.25
Total Monthly Commitments
Car loan 500
Credit card bills 400
PTPTN loan 100
Total monthly commitment 1,000

Debt Service Ratio (DSR): (RM1000/RM5,000) x 100% = 20%

Assuming the above is your net income and net monthly commitments, the banks will then assume that your maximum Debt Service Ratio (DSR) is 20%.

If you’re still unsure on how to calculate your DSR, check out LoanCare. This tool  will compare your customised home loan eligibility from up to 17 banks in Malaysia.

Next, how much mortgage loan you can get will be dependent on the bank. The calculation method provided here is a general one to give you a base idea of how much is your DSR. However, different banks have different ways of calculating the Debt Service Ratio (DSR). Different banks also have different guidelines, and while the DSR threshold should be based solely on income level, some banks even take into account the individual’s net worth, and even factors like the person’s age and qualifications.

READ: What is CTOS and how does credit score affects a home loan approval?

How do banks calculate Debt Service Ratio (DSR)?

Every bank may have a significant difference in the final calculated DSR amount. This is because every bank has its respective calculation methods for income and commitment recognition. Hence it is not surprising that some individuals can get up to a 20% difference in DSR calculation from different banks.

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.

© Getty Images

Below are a few examples of how the different banks may calculate their debt service ratio:

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.

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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

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