Debt Service Ratio (DSR): How to calculate and how does it affect home loan approval?

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This article was updated on 8 June 2022. 

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) limits, so it is important that you research first to avoid your home loan getting rejected.

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What is Debt Service Ratio (DSR)?

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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What is a good Debt Service Ratio in Malaysia?

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. Thus, a good DSR should be within the 50%-70% range, and we would say the lower this figure is, the better.

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. having DSR information is essential and will give prospective buyers a better idea of which bank(s) to approach for a better chance of getting their home loan application approved on the first attempt.

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

How do you calculate Debt Service Ratio (DSR)?

As aforementioned, the DSR percentage shows how much of your income is being used to pay off debt and if you can afford to take up the housing loan you have in mind. The DSR formula is as follows:

DSR = Debt/Net Income X 100

Debt refers to all existing financial obligations, such as credit card repayments, personal loans and student loans, whereas net income refers to your income after deductibles, such as income tax and EPF.

Let’s assume your household income is RM5,000 per month (this could either be the salary of a single working professional or a double-income couple). After deducting EPF, income tax and SOCSO, your net income would amount to roughly RM4,300.

Hence, in order to fulfil the minimum 70% DSR rule, your household’s total debt cannot exceed RM3,010.

DSR of 70%RM3,010/RM4,300 X 100

Let’s say you have the following monthly financial obligations. These estimates are loosely based on the average Malaysian millennial living in an urban area:

  1. Car loan: RM500
  2. Credit card repayments: RM400
  3. PTPTN Loan: RM100.

Other financial debt/obligations = RM1,000. 

Therefore, for those with a gross household income of RM5,000 and a net income of approximately RM4,300; when taking up a housing loan, their monthly home loan instalment figure must not be more than RM2,010.

Total Debt – Other financial debt = RM3,010 – RM1,000 = RM2,010.

How will DSR affect my home loan approval?

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Most banks including Maybank and Public Bank have a DSR cap of 60-70% for first-time homebuyers, so it is crucial that you calculate your repayment ability for your target home before making the next move. Do not forget that the DSR limit might be even lower for upgraders or those who are planning to take on a second home loan. Hence, the last thing you want to be doing is to utilise your entire salary for housing expenses.

If you’re still unsure about 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 limit 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 affect 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 its respective guidelines for the maximum allowable DSR limit.

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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.

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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