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> Debt-service ratio (DSR)

wild_card_my
post Oct 7 2015, 03:11 PM, updated 9 months ago

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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.

user posted image
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

Calculation example

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.

user posted image
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.

user posted image
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.

Final thoughts

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.

Related articles

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
wongmunkeong
post Oct 7 2015, 05:02 PM

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Good info Wild_Card_MY.

May i clarify what "most probable criteria" for "high net worth applicants" for DSR limit calculations?
eg.
i'm a wage-slave / employee earning less than.. MahJib
but an accumulator & investor,
thus curious how to "prove", in order to be able to get >90% DSR (just in case wanted lar tongue.gif)
wild_card_my
post Oct 7 2015, 09:08 PM

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QUOTE(wongmunkeong @ Oct 7 2015, 05:02 PM)
Good info Wild_Card_MY.

May i clarify what "most probable criteria" for "high net worth applicants" for DSR limit calculations?
eg.
i'm a wage-slave / employee earning less than.. MahJib
but an accumulator & investor,
thus curious how to "prove", in order to be able to get >90% DSR (just in case wanted lar tongue.gif)
*
It depends on the banks, some of them have established limits like OCBC and CIMB.

For OCBC, typically they would like you to have RM1m worth of assets under OCBC's management to be considered HNW.

While for CIMB, being their preferred customers would already entail you to become HNW and given preferred rates and DSR, to become their preferred customer, you need to either deposit RM250k, or invest (fee-based) up to RM150k.

While for some banks like Maybank, the credit controllers may have the discretion to authorize the approval of the loans for customers that do not follow the credit guideline. For example, I have processed a case where the total DSR was 160%, but the customer had unencumbered assets worth RM1.9 million, while the loan amount requested was only RM1.5m. Assets that he had were in the form of savings, property, unit trust, and shares.

This post has been edited by wild_card_my: Oct 7 2015, 09:08 PM
wongmunkeong
post Oct 7 2015, 10:21 PM

If U wanna criticize / bitch, pls bring some possible solutions.
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QUOTE(wild_card_my @ Oct 7 2015, 09:08 PM)
It depends on the banks, some of them have established limits like OCBC and CIMB.

For OCBC, typically they would like you to have RM1m worth of assets under OCBC's management to be considered HNW.

While for CIMB, being their preferred customers would already entail you to become HNW and given preferred rates and DSR, to become their preferred customer, you need to either deposit RM250k, or invest (fee-based) up to RM150k.

While for some banks like Maybank, the credit controllers may have the discretion to authorize the approval of the loans for customers that do not follow the credit guideline. For example, I have processed a case where the total DSR was 160%, but the customer had unencumbered assets worth RM1.9 million, while the loan amount requested was only RM1.5m. Assets that he had were in the form of savings, property, unit trust, and shares.
*
hm.. OCBC version i definitely wont ever qualify - i DIY my investments tongue.gif
CIMB's sounds a lot like HSBC's and Citi's in terms of "preferential treatment" but i think the last is the best - as long as can prove "clean"/unencumbered financial assets > loan is enough?
Didn't MBB ask for the assets as collateral or have some of them "parked" with them (like stocks, savings, FDs)?
wah.. if not, very flexible neh

again - thank U Wild_Card_MY for sharing the parameters.
at least common joes like me will know how/what to shoot for notworthy.gif
wild_card_my
post Oct 7 2015, 10:59 PM

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QUOTE(wongmunkeong @ Oct 7 2015, 10:21 PM)
hm.. OCBC version i definitely wont ever qualify - i DIY my investments tongue.gif
CIMB's sounds a lot like HSBC's and Citi's in terms of "preferential treatment" but i think the last is the best - as long as can prove "clean"/unencumbered financial assets > loan is enough?
Didn't MBB ask for the assets as collateral or have some of them "parked" with them (like stocks, savings, FDs)?
wah.. if not, very flexible neh

again - thank U Wild_Card_MY for sharing the parameters.
at least common joes like me will know how/what to shoot for notworthy.gif
*
With the case I had with Maybank for the client with 160% DSR, you would require a good recommendation written by the sales force. As long as you are upfront with all your investments and provide all the requested documents without any issue, they would quantify your total assets to consider if you are HVW.

Like I mentioned, each banks have different criteria, some of them are more strict and structured while others have some capacity to negotiate. The key is to be patient with the mortgage agent/salesperson serving you as there will be a lot of documentations involved.

Also, the time taken for processing may be longer since cases like this will be escalated to higher levels for approval.
ohcipala
post Oct 8 2015, 06:21 PM

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What if my salary is commission or allowance based, whereby the commission and allowance vary every month? How does the bank calculate my monthly net income? By averaging it out 12 months?

And from figure 3 whereby the applicant's net income is ~15k, shouldn't his DSR limit be 90% instead of 80%?

Informative post by the way. thumbup.gif
wild_card_my
post Oct 8 2015, 07:34 PM

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QUOTE(ohcipala @ Oct 8 2015, 06:21 PM)
What if my salary is commission or allowance based, whereby the commission and allowance vary every month? How does the bank calculate my monthly net income? By averaging it out 12 months?

And from figure 3 whereby the applicant's net income is ~15k, shouldn't his DSR limit be 90% instead of 80%?

Informative post by the way.  thumbup.gif
*
There are a couple of way to go about this:

1. Tax documents, most banks would accept 100% of whatever you declared in your borang B

2. Provide 6 months commission statements with bank statement to back it up. BUt most banks would only accept 80% of the income, just like rental income.

3. In some occasions, banks like OCBC would accept 100% of Great Eastern insurance agents' income, the same goes with HLBB and its sister company, HLBB Assurance.

ANd thanks for noting my mistake. Made a mistake due to the outdated figures mixed with updated ones. WIll correct them ASAP.
b00n
post Oct 9 2015, 07:57 PM

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QUOTE(wild_card_my @ Oct 7 2015, 09:08 PM)
It depends on the banks, some of them have established limits like OCBC and CIMB.

For OCBC, typically they would like you to have RM1m worth of assets under OCBC's management to be considered HNW.

While for CIMB, being their preferred customers would already entail you to become HNW and given preferred rates and DSR, to become their preferred customer, you need to either deposit RM250k, or invest (fee-based) up to RM150k.

While for some banks like Maybank, the credit controllers may have the discretion to authorize the approval of the loans for customers that do not follow the credit guideline. For example, I have processed a case where the total DSR was 160%, but the customer had unencumbered assets worth RM1.9 million, while the loan amount requested was only RM1.5m. Assets that he had were in the form of savings, property, unit trust, and shares.
*
Just to clarify, BNM guideline on Responsible Finance specifically defines qualification for High Net-worth customer which is set at Rm1 million, although they never specifically mentioned what type of assets nor the assumptions:
For high net-worth customers (i.e. customers with total net personal assets exceeding one million Ringgit), flexibility is provided for the FSP to consider the customers’ deposits, assets and/or investments in assessing the customers’ ability to repay the financing.

So deposits of RM250k or investment of RM150k definitely will not qualify the guy as HNW! Unless under this same scenario the bank can produce proof which states that customer besides depositing RM250k there also have the same deposit amounts in 3 other banks which total up to RM1 million.

The term net personal asset theoretically can be interpreted as net off any encumbered portion. Example property worth RM1 million. Plain vanilla, the guy have RM1 million asset. However if property is collateralize to a mortgage with example RM800k loan, it may mean net personal asset of the guy is only RM200k.

And by the way, it is also worth to mention that figure 1 illustration on calculation of debt commitment is not standardize across the banks. Example, Car Hire purchase; Bank A may decide to use 7 years tenure with 2.5% interest rate while Bank B may choose conservative with tenure of 5 years with 3% interest rate. So assumptions for calculation on debt commitment vastly differs from bank to bank.

I believe only cards have the most standardize calculations which is 5% min payment. Therefore the way to sort of beat the DSR, is before applying for a loan; ensure card balances is cleared as much prior to the month one wants to apply loan. That will bring down DSR.

Some banks also used cards utilization as a yardstick which I encountered recently this year when I apply for another mortgage loan. I wouldn't name names, but this bank while processing my case although my card balances is high; so rough calculations my DSR comes to around 90%. They sort of justify it for approval based on me having qualified for high card limits but with utilization less than 30%.
wild_card_my
post Oct 11 2015, 08:00 AM

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yes, I noticed I did not make it clear that different banks have different DSR tables. Will update my writing with the contribution you made. Please keep it up, more coming soon!
yunodie
post Oct 26 2015, 04:25 PM

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hi wild_card_my, very informative post. Keep up the good work!
roy_zu
post Oct 26 2015, 05:20 PM

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Very good info there bro. Thanks. I have few questions and hope you might able to clear my doubt.

1. I have a joint home loan with my spouse whereby the loan and house ownership shared between both. How will the bank calculate my commitment? full monthly installment or divided into 2?

2. I'm currently action as a guarantor for my mom for her business loan which she look under her enterprise. Does this commitment fall under my bucket as well?
the99percent1
post Oct 27 2015, 06:59 PM

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How does the dsr calculate if working overseas and drawing salary of foreign currency ?
wild_card_my
post Oct 27 2015, 11:41 PM

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QUOTE(yunodie @ Oct 26 2015, 04:25 PM)
hi wild_card_my, very informative post. Keep up the good work!
*
You are most welcome!

QUOTE(roy_zu @ Oct 26 2015, 05:20 PM)
Very good info there bro. Thanks. I have few questions and hope you might able to clear my doubt.

1. I have a joint home loan with my spouse whereby the loan and house ownership shared between both. How will the bank calculate my commitment? full monthly installment or divided into 2?

2. I'm currently action as a guarantor for my mom for her business loan which she look under her enterprise. Does this commitment fall under my bucket as well?
*
1. When you are applying for a new loan from another bank, the new bank will calculate the joint-loan commitments as half, as it is shown in the CCRIS. However, if you can show the new bank the LO for the joint-loan, and so it happens that the loan has more than just 2 names on it, the commitments will be divided according to the number of names on the loan.

2. It depends, some banks will put a guarantor as part of the loan applicant, others don't. For banks that don't then you are safe. For banks that do, well you are out of luck. To be sure, just go to bank negara malaysia to find out through your CCRIS report. Good luck.

QUOTE(the99percent1 @ Oct 27 2015, 06:59 PM)
How does the dsr calculate if working overseas and drawing salary of foreign currency ?
*
The DSR is always calculated based on the RM currency. So if you are getting paid in foreign currency, the bank would convert the currency to RM, and use their internal DSR guideline to determine your DSR limits.
the99percent1
post Oct 28 2015, 01:14 AM

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QUOTE(wild_card_my @ Oct 27 2015, 11:41 PM)
The DSR is always calculated based on the RM currency. So if you are getting paid in foreign currency, the bank would convert the currency to RM, and use their internal DSR guideline to determine your DSR limits.
*
I see... so what about the epf/income tax calculations? will it show up as nil since Im not working in Msia any longer?
wild_card_my
post Oct 28 2015, 01:50 AM

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QUOTE(the99percent1 @ Oct 28 2015, 01:14 AM)
I see... so what about the epf/income tax calculations? will it show up as nil since Im not working in Msia any longer?
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Yes and no.

1. If you are working overseas, the banks will ask for you to provide your tax documentations (for example, NOA for singapore, PAYG for Australia, Borang B/BE for Malaysia) for the banks to calculate your net income.

2. EPF wouldn't be a factor since you are not contributing.


ahte86
post Oct 30 2015, 03:08 PM

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QUOTE(wild_card_my @ Oct 27 2015, 11:41 PM)
You are most welcome!
1. When you are applying for a new loan from another bank, the new bank will calculate the joint-loan commitments as half, as it is shown in the CCRIS. However, if you can show the new bank the LO for the joint-loan, and so it happens that the loan has more than just 2 names on it, the commitments will be divided according to the number of names on the loan.

2. It depends, some banks will put a guarantor as part of the loan applicant, others don't. For banks that don't then you are safe. For banks that do, well you are out of luck. To be sure, just go to bank negara malaysia to find out through your CCRIS report. Good luck.
The DSR is always calculated based on the RM currency. So if you are getting paid in foreign currency, the bank would convert the currency to RM, and use their internal DSR guideline to determine your DSR limits.
*
Hi sir, appreciate if you can answer my question. Same question if it is a joint-name housing loan but the housing loan only under my account (one person name) and i apply another P.Loan under the same bank as my housing loan, will the office count my DSR as 1 or divided by 2? =\

This post has been edited by ahte86: Oct 30 2015, 03:10 PM
kim.hyc
post Nov 6 2015, 02:35 PM

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hi ! great topic and i happen to have a confusing situation. To make explanation easier, let me put it in numbers.

A) Gross: 5k

DEDUCTIONS
B) EPF/SOCSO etc: 700
C) Deduction for savings (ASB, Tabung Haji, Koperasi etc): 250
D) Biro Angkasa (for bank loans, Bank Rakyat, BSN etc): 300
E) Biro Angkasa (for non-bank loans i.e: Govt,MBSB, Koperasi etc): 400

OTHER COMMITMENTS
F) HP: 500

Question no 1
How does banks treat deductions for savings ©

Question no 2
How does bank treat loans paid through Biro Angkasa deductions? For case D and case E.
I know that E also appears in CCRIS report, but not too sure regarding case D. Let's assume it's not in CCRIS.
- Is deduction by Biro Angkasa for both cases calculated as commitment outside payslip or included in the calculation for nett income?

Question no 3
How do i calculate DSR from here?

If i take nett income as nett income stated in the payslip = A - B - C - D - E = 3,350
DSR would be 14.9%

But if i take nett income as A-B = 4,300 and commitment as C+D+E+F=1,450
DSR would be 33.7%

And depending on the answer for question no 1 and 2, the DSR would differ again. rclxub.gif

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