What Is A DSR And Why Does It Matter?
Do you have your eye on a dream home or car? Thinking of taking out a loan to finance it? Well, you might want to take a step back first as different banks have different debt service ratio (DSR) limits. As such, you will probably want to do a little research first to avoid getting your home loan rejected.
What is a debt service ratio?
At first glance, DSR is fairly easy to define. It is what proportion of your household income goes into paying debt. In general, it is a measure of a person’s ability to manage and settle their debt. It is a key part of financial health as your DSR is one of the three major factors that affect your risk profile as a borrower.
What is a good DSR to have?
If you want to get your hands on some new property, your DSR should generally not exceed 30%.
While this is a rule of thumb and not written in stone, for the most part, banks are very unlikely to favour borrowers that exceed this limit. Some banks may accommodate borrowers with a DSR of up to 70%, but this is at the extreme end of the spectrum as it is extremely risky to be spending that much of your income on servicing loans. Ideally, you will want to keep your DSR at around 30% to be safe.
Banks utilise your DSR to help them determine how much of your income is being used to pay off your debts and other obligations. It is also used to determine if you are in a good enough position to afford taking up the housing loan you are applying for.
Having a low DSR signals to banks that you are more likely to be able to pay back your monthly instalments on time and that there is a lower risk of you defaulting on said payments.
Calculating your DSR
Figuring out your DSR is rather easy. All you need to do is divide how much debt you owe each month by your net income. This amount is then expressed as a percentage.
DSR % = Debt ÷ Net Income X 100
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 deductibles, such as income tax and EPF contributions.
Let’s assume your household income is RM8,000 per month (this can be the income of a single professional worker or the total combined income of a couple). After deducting EPF, income tax and SOCSO, you should get a net income of approximately RM6,500.
Therefore, in order to meet a DSR of 30%, your household’s total debt cannot exceed RM1,950.
DSR of 30% = RM1,950/RM6,500 X 100 Now let us assume that you have the following monthly financial obligations: Car loan: RM500 Credit card repayments: RM400 PTPTN Loan: RM100 Total financial debt = RM1,000 So if your gross household income is at RM8,000 and your net income is approximately RM6,500; then when you take up a new housing loan, your monthly home loan instalment figure should not be more than RM950.
DSR of 30% = RM1,950/RM6,500 X 100
Now let us assume that you have the following monthly financial obligations:
Car loan: RM500
Credit card repayments: RM400
PTPTN Loan: RM100
Total financial debt = RM1,000
So if your gross household income is at RM8,000 and your net income is approximately RM6,500; then when you take up a new housing loan, your monthly home loan instalment figure should not be more than RM950.
How will DSR affect you home loan approval
The maximum DSR limit varies widely from one bank to another. Even within the same bank, there could be different guidelines depending on what kind of loan you are applying for, resulting in different DSR requirements.
For first time home-buyers, you should be in a good spot if your DSR is within the 30% range. The last thing you want to be doing is dedicating almost all of your income for housing expenses, leaving no room for savings.
If you are still unsure of what you are getting yourself into, you can utilise iMoney’s home loan calculator to calculate monthly repayments, interest charges, and other details on your own.
Improving 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 far less likely to form a history of loan rejections. You can improve your DSR in one of two ways:
Reducing your debt
The most straightforward way is to cut down on your spending to reduce your total debt or find a way to increase your net income. For reducing debt, you could try identifying credit card spending that is unnecessary and cut down on it to increase your DSR. You also should not take for repayments of non-bank debts for granted either as banks will look at these repayments in the same way as other bank debts.
You can also consider using debt consolidation in order to reduce your monthly payments.
Increasing your net income
Increasing your net income is a little trickier, as it requires you to either find a secondary source of income, or seek a pay rise from your job. If you are not sure where to start, we have a simple guide with a few tips on how to go about asking for a promotion.
Combined income with spouse
Another method to improve your DSR is by combining your income as “joint purchasers” with a spouse or partner in your loan submission. However, make sure that the both of you fully understand your individual legal rights as joint-purchasers.
Know your DSR before you take on more debt
To summarise, before you go out and apply for a new housing loan, always calculate your DSR beforehand. Figure out your net income, expenses and total debt in order to figure out how much you will be able to comfortably spend on instalments. Finally, do some background research to find out which banks have the best loans that fit your DSR overall financial situation. Keep all these in mind and you can avoid the dreaded rejection on your loan application.