What comes next after a career, car and family? A house, of course! Buying your first home can be exciting, but you need to take stock of your overall finances before you start property hunting. One way to evaluate your financial health is using a DSR calculator in Malaysia, which calculates your debt to income ratio.
Purchasing a property may well be one of the biggest purchases you make in life. As such, you need to make sure you have enough money to pay for your mortgage payments. The application process for a home loan can also be tedious and lengthy, with banks scrutinising your credit history, occupation and more.
Apart from getting approved for a home loan, you may wonder how much you can actually borrow to finance your home. This is where the Debt Service Ratio (DSR) comes in.
What is the Debt Service Ratio (DSR)?
The Debt Service Ratio, or DSR, is a calculation used by banks to determine a person’s capacity to make the loan or mortgage repayments.
To put things into perspective, the DSR formula helps banks estimate how much you can afford to pay for your monthly instalments.
How to Calculate Your DSR
In simple terms, your DSR is calculated by dividing your total monthly commitments by your total monthly income. Here’s the formula to calculate your DSR before heading to the bank:
Debt Service Ratio (DSR) = (Total monthly commitments)/(Total monthly income)×100%
What counts as a commitment? For the purposes of calculating your DSR, your commitments should include both bank and non-bank debts.
Bank debts include:
- Car loans
- Housing loans
- Personal loans
- Credit card bills
Non-bank debts include:
- Education loans (e.g. PTPTN)
For a better understanding, here is an example of calculating DSR.
|Total Monthly Commitments||RM1,500 (Personal loan) + RM500 (Car loan) + RM300 (Credit card) + RM200 (PTPTN loan) = RM2,500|
|Debt Service Ratio (DSR)||RM2,500/RM8,000 x 100% = 31.25%|
With a monthly income of RM8,000 and a monthly commitment of RM2,500, the debt ratio is 31.25%. With a monthly commitment of less than 50%, this is an acceptable figure as banks typically accept DSRs below 50-60% (for a minimum disposable income of RM1,500).
Note that the subsequently approved housing loan must not increase the monthly commitment (DSR) until it exceeds 60%. In this case, the additional monthly instalment for the home loan cannot be more than RM2,300. Why? To illustrate, here’s the formula to calculate DSR after loan approval:
Debt Service Ratio (DSR) = (Total monthly commitments + Monthly commitment of new loan)/(Total monthly income)×100%
|Total Monthly Commitments||RM1,500 (Personal loan) + RM500 (Car loan) + RM300 (Credit card) + RM200 (PTPTN loan) + RM2,300 (New loan) = RM4,800|
|Debt Service Ratio (DSR)||RM4,800/RM8,000 x 100% = 60%|
The Importance of DSR in Your Refinancing Plan
Essentially, your DSR determines if you’re eligible to refinance your housing loan. With your final DSR figure calculated, you can compare it against each bank’s maximum allowable DSR threshold.
If your DSR is within the bank’s limit, you stand a higher chance of your mortgage or refinancing loan being approved. Generally, the lower your DSR, the better the chances of loan approval. As a rule of thumb, you should try to maintain your DSR within 30-40%.
Not sure if refinancing is the suitable for you? Learn more about the basics of refinancing your housing loan and how it works.
When to Check Using a DSR Calculator in Malaysia
Before applying for a housing loan, you should check your DSR as well as your creditworthiness from CCRIS and CTOS reports. This is because banks will consider many factors besides just your DSR.
The earlier you check your DSR and credit score, the more time you have to reduce your debts, increase your net income and build your credibility as a borrower.
Unsure of how to calculate your DSR? Check your DSR using this DSR calculator, which compares your home loan eligibility against up to 17 banks in Malaysia.
Factors that Impact Your DSR
Several factors can impact your DSR, including:
Different DSR Calculators
- Every bank has its respective formula or DSR calculator in Malaysia, which may recognise different amounts for income and commitment.
- Some banks may calculate DSR using your gross income, while others may base it on your net income (after tax, EPF and SOCSO deduction, etc.). Hence, the final DSR amount may vary between each bank.
Credit history and credit score
- These will indicate if you are a good paymaster and the likelihood of you paying off your monthly loan repayments.
- Depending on your income range, the maximum allowable DSR limit for each bank differs too. Individuals without a stable monthly income may find themselves at a disadvantage when fulfilling their loan repayments.
- Banks will also consider your industry and employment period to determine the stability of your occupation.
Existing bank debts/loans
- Having too many existing loans under your name and account can also affect your chances of loan approval as it increases your DSR.
5 Ways to Improve Your DSR and Credit Rating
For those with a DSR of more than 50-60%, don’t worry, as there’s still hope yet. You can start improving your DSR and credit score with these simple steps.
1. Reduce your total debts/commitments
Whether it is outstanding loans, unpaid credit card bills or PTPTN loans, you should clear off the debts as soon as possible. Consider consolidating your debt to conveniently manage all your debts and even save costs on interest.
2. Maintain a good credit history/score
Making payments on time and in full will improve your creditworthiness and indicate that you’re a good paymaster to banks. Avoid missing or making late payments, as these will be reflected in your CTOS and CCRIS reports.
3. Keep a low credit card balance
Your credit card balance should be kept at the minimum or below 30% of your credit limit. A low credit card balance also means low credit utilisation, which demonstrates your ability to spend responsibly.
As you pay off your credit card bills on time, your credit utilisation should also decrease.
4. Make sure you have sufficient savings
Banks will also take into account your savings. If you have reserve funds that you can turn to, banks will consider you a low-risk borrower with lower chances of defaulting on your payments.
5. Start building a credit record
An individual with zero credit history equates to zero credibility. Banks are more likely to reject your loan application if you do not provide credible proof that you can make your loan repayments.
Especially for first-time loan applicants and fresh graduates, an easy way to build a credit history is by applying for a credit card. Then, all you have to do is keep a low balance and pay your credit card bills in full every month.
Loan Application Rejected Services
Has your loan application been rejected? As a leading one-stop loan specialist and solutions provider, Bluebricks offers comprehensive loan rejected services.
By helping you solve the underlying problem with your loan application, we can help you identify if your refinancing loan application was rejected due to your DSR. We ensure that your resubmitted loan application has a higher chance of approval.
With our refinance housing loan rejected service, we provide consultation and effective solutions that will help you save precious time and money.
DSR Calculator Malaysia — FAQs
Now that you’re equipped with the basics of DSR and how to use a DSR calculator in Malaysia, we hope you’re well on your way to obtaining a loan to finance your dream home. Once you have calculated your DSR, you’ll know better which bank accepts your DSR and the maximum home loan amount you are eligible for.
1. What counts as a high DSR?
Your DSR will be compared to the bank’s maximum allowable DSR threshold. Typically, it would be best if your DSR is below 50-60%. You can use an online DSR calculator to compare the DSR limits of the banks in Malaysia.
2. What are the factors that banks consider when you apply for a home loan?
When evaluating your loan application, there are various factors that banks take into account, including:
- The property value
- Your income
- Debt Service Ratio (DSR)
- Credit history and credit score
- Your savings and net worth
- Your age and loan tenure
3. How can I reduce my monthly commitments?
With proper planning and a conscious effort, you can reduce your financial debts and improve your DSR. Here are some simple ways:
- Assess overall financial obligations
- Keep a strict budget aligned to your debt commitments
- Create a debt reduction strategy or plan
- Negotiate with your creditors
- Implement and stick to your debt plan