Debt-service ratio (DSR)
Debt-service ratio is a tool used by financial institutions to calculate the portion of your net income that can be used to service current and new loans. The tool is used to determine if the loan applicant is over-burdened with loan commitments. DSR is quoted in the form of a percentage with different financial institutions having different DSR limits. In addition, the customers' net income play a role in determining the applicable DSR limit. Applicants with higher net income are allowed to borrow more, hence their DSR limit is higher than applicants with lower net income.
Figure 1. The debt-service ratio of a foreign bank operating in Malaysia
How do you make use of the DSR?
The banks use the DSR to determine if the applicant is worthy of adding a new loan commitment on top of the ones the applicant may already have. That means the banks will have to find out all loan commitments held by the applicant by looking at the applicant's CCRIS records to calculate the applicant's total monthly commitment. The total current commitment plus the new loan commitment is divided by the net income to get the applicant's DSR. If the DSR is lower than the allowed DSR limit, the loan is likely to be approved provided there are no other credit issues.
How do you get around the DSR limit?
Strictly speaking, there is no getting around the DSR limit. However, it is important to understand how the system works so the applicant could make enough preparation before applying for the loan. It is important for the applicant to maintain a high level of net income while reducing bank commitments as much as possible.
Related reading: How to manage your finances to maintain high levels of net income and reduce loan commitments as much as possible for the purpose of loan applications
The applicant's loan commitments are extracted from the CCRIS record updated by Bank Negara Malaysia (BNM). Depending on the type of loans, the outstanding balance or the original loan amount is used to calculate the commitments.
Figure 2. Monthly commitment as calculated by the bank
The net income is derived from the gross income and appropriately deducted for EPF, SOCSO, and applicable taxes according the Malaysian tax rates of the year.
Figure 3. Monthly net income as calculated by the bank
Calculation of the applicant's DSR:
[RM2962.82 / RM7217.59] x 100% = 41.05%
According to Figure 1, the applicant has a DSR-limit of 80%, meaning the applicant has up to 38.85% worth of monthly net income left to be used for the loan application.
DSR is the yardstick used by the banks to calculate the amount of loan that you could borrow. Different banks allocate different DSR-limits to their borrowers of whom have different levels of net income. As such, it is not uncommon for a loan application submitted to multiple banks to be approved by some while rejected by another. However, by managing your finances well, you get to keep your DSR low and as a result, the maximum loan amount that you could borrow is higher.
Financial Faiz's Mortgage Series Ep.1, Debt-service ratio (DSR)
Financial Faiz's Mortgage Series Ep.2, Choosing your SPA/S&P and LA Lawyers
Financial Faiz's Mortgage Series Ep.3, Refinancing your property for cash
This post has been edited by wild_card_my: Apr 20 2017, 05:04 PM
Debt-service ratio (DSR)