Don’t apply for a Home Loan until you read this! Home Loan Debt Service Ratio (DSR)
Everything you need to know about Debt Service Ratio.
Debt service ratio is used by a bank to calculate the eligibility of loan for a borrower. To be honest, debt service ratio by banks changed a lot since the last decade. And sometimes, it’s quite hard to keep up as different banks will have their method of calculation or ways to take a borrower income or commitment.
However, the fundamental of DSR calculation will not be varied too far from one bank to another.
What is Debt Service Ratio (DSR)?
DSR is shown how much of a person’s income is used to service debt installments. It is derived from 2 main components:
b. Existing debt & new applied loan
Every bank will have their own guidelines for maximum allowable DSR threshold.
DSR (%) = commitments (new & existing) / income x 100
RHB Bank might take 80% DSR
HSBC Bank might consider 70% DSR
Let’s look at two critical components of DSR
You’ll need to have an income to apply for a loan. Because there is no way, you’ll be able to service a loan without income. Income or salary are quite important to determine how much loan will be given and the DSR range.
For example: (Different banks will have different income range)
Income less than RM3000: Allowable DSR is 60%
Income between RM3001 to RM5000: Allowable DSR is 70%
Income between RM5001 to RM8000: Allowable DSR is 75%
What type of earning consider as income?
1. Fixed monthly income/salary
2. Rental income
3. Justifiable part-time income, e.g., part-time teaching, a part-time waiter, part-time accounting, etc.
4. A dividend, e.g., ASB, Tabung Haji, etc.
5. Income receive from oversea
All above income, preferably to be proof with documents from employer and bank statement.
Banks will have a different method of taking part-time income or any variable income. Some might take a certain percentage, maybe in the range of 60%-80%.
For example, if part-time income monthly wage is RM2000, certain banks might take 80% x RM2000 = RM1600 only.
Commitments are all borrowings a borrower has from any banks or creditors that will reflect on CCRIS report. If it doesn’t show on CCRIS report or payslip, you might able to omit this commitment.
Quite common commitments are:-
a. Car Loan
b. Housing Loan
c. Credit Card (example, based on outstanding amount x 5%= minimum payment )
d. Personal Loan
e. Study Loan e.g., PTPTN
All the commitments should have a good track record. Meaning, the borrower is paying all commitments on time.
Every bank will have their own DSR calculator to calculate the installment for a borrower commitments.
Sometimes, it might be varied significantly from the original installment. And when that happen, a letter offer or bank statement of the commitment can be provided to the bank for an appeal.
On top of that, a bank will also calculate the new commitment of the new loan and add up under the commitment category.
So, how’s the DSR calculation works? Let’s explore.
Mr. Adam is buying a new house and he is applying for a new housing loan.
His monthly net income: RM6000.00
a. Car Loan instalment : RM800
b. Housing Loan (1st house) : RM1000
c. Credit Card Outstanding Balance : RM5000 x 5% = RM250
Commitments for new housing loan: RM2000
Total commitments are RM800+RM1000+RM250+RM2000= RM4050.00
Debt Service Ratio: RM4050/RM6000 x 100 = 67.50%
So, if the bank’s guidelines for DSR is less than 70%, he is qualified for the loan.
In the event, your loan has been rejected by one bank, try not to pursue the application until you’ve print your CCRIS report and explore the reason for rejection or find other alternatives way to get your home loan approve. If you’re scratching your head for this part, head over to our website or call us at 012-6946746. We might able to help you.
I received monthly income by cash. So, what should I do?
You should bank in the income consistently for few months (at least six months) and keep the bank statement.
Example, if you received RM3111.11, then you should bank in RM3111.11, not RM3000 because you’ll need to tally with the payslip or salary voucher.
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