Do you have your eye on a dream house or car? Are you considering taking out a loan to finance it? Well, you might want to take a step back first because different banks have different Debt Service Ratio (DSR) limits. As such, you’ll probably want to do a little research first to avoid having your home loan rejected.
What is a debt service ratio?
At first glance, DSR is quite easy to define. This is the proportion of your household income spent on paying off debt. In general, it is a measure of a person’s ability to manage and settle their debt. It’s a key part of financial health because your DSR is one of the top three factors that affect your risk profile as a borrower.
What’s a good DSR to have?
If you want to get your hands on a new asset, your DSR should generally not exceed 30%.
Although this is a rule of thumb and not set in stone, banks are highly unlikely to favor borrowers who exceed this limit. Some banks can accommodate borrowers with a DSR up to 70%, but that’s on the far end of the spectrum because it’s extremely risky to spend so much of your income servicing loans. Ideally, you’ll want to keep your DSR around 30% to be safe.
Banks use your DSR to help them determine how much of your income is used to pay off your debts and other obligations. It is also used to determine if you are in a sufficient position to allow you to take out the mortgage you are applying for.
Having a low DSR signals to banks that you are more likely to be able to repay your monthly payments on time and there is less risk of you failing to make those payments.
Calculating your DSR
Determining your DSR is quite easy. All you have to do is divide your monthly debt amount by your net income. This amount is then expressed as a percentage.
DSR % = Debt ÷ Net Income X 100
Debt refers to the total of all your existing financial obligations. These can include credit card repayments, personal loans and student loans. On the other hand, net income refers to your income after deductions, such as income tax and EPF dues.
Suppose your household income is RM8,000 per month (this could be the income of a single professional worker or the combined total income of a couple). After deducting EPF, income tax and SOCSO, you should have a net income of around RM6,500.
Therefore, in order to meet a DSR of 30%, your total household debt cannot exceed RM1,950.
How to calculate your DSR
30% DSR = RM1,950/RM6,500 X 100
Now suppose you have the following monthly financial obligations:
Car loan: RM500
Credit card refunds: RM400
PTPTN Loan: RM100
Total financial debt = RM1,000
So if your gross household income is RM8,000 and your net income is around RM6,500; Then, when you take out a new home loan, your monthly home loan amount should not exceed RM950.
How DSR Will Affect Your Home Loan Approval
The maximum DSR limit varies widely from bank to bank. Even within the same bank, there may be different guidelines depending on the type of loan you are applying for, resulting in different DSR requirements.
For first-time home buyers, you should be in a good position if your DSR is in the 30% range. The last thing you want to do is spend almost all of your income on housing expenses, leaving no room for savings.
If you’re still not sure what you’re getting yourself into, you can use iMoney’s Home Loan Calculator to calculate monthly repayments, interest charges and other details yourself.
Improve your DSR
The lower your DSR, the better! The best thing to do is to play it safe and keep your DSR as low as possible. This way you are much less likely to form a history of loan denial. You can improve your DSR in two ways:
Reduce your debt
The easiest way is to reduce your expenses to reduce your total debt or find a way to increase your net income. To reduce debt, you can try to identify unnecessary credit card expenses and reduce them to increase your DSR. You should also not take repayments of non-bank debt for granted, as banks will look at these repayments in the same way as other bank debt.
You can also consider using debt consolidation to reduce your monthly payments.
Increase your net income
Increasing your net income is a bit trickier, as it requires you to either find a secondary source of income or seek a pay rise from your job. If you don’t know where to start, we have a simple guide with some tips on how to ask for a promotion.
Income combined with spouse
Another method to improve your DSR is to combine your income as “co-buyers” with a spouse or partner in your loan submission. However, make sure you both fully understand your individual legal rights as co-purchasers.
Know your DSR before taking on more debt
To sum up, before you start a new housing loan application, always calculate your DSR beforehand. Determine your net income, expenses, and total debt to determine how much you can comfortably spend on installments. Finally, do some background research to find out which banks have the best loans that match your overall DSR financial situation. Keep all of this in mind and you can avoid the dreaded rejection of your loan application.
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