So you just just found the perfect property that pushes all your hot buttons. But do you know whether your loan will be approved before placing a booking? If the loan is rejected, you may be wasting your time.

To ensure you have a higher chance to getting your loan approved you need to know what Debt Service Ratio is.

What is Debt Service Ratio?

To find out whether you are eligible for the loan you’re applying for, banks assess whether you can afford the loan using Debt Service Ratio.

This allows the banks to make a proper evaluation on how much you can loan and whether you can pay your monthly instalments.

To calculate it, take your total monthly net income and your total monthly debt that you have to pay each month (this includes your PTPTN, hire purchase, personal loan and other existing home loans). This allows the bank to assess your ability to make monthly instalments.

When banks lend you money, they are not doing out of the goodness of their hearts. You are an asset to the bank’s shareholders. Bank officers need to ensure that you can actually repay your home loan before submitting to headquarters for approval.

Debt Service Ratio is not the only thing banks look at, you can learn more about CCRIS and how it affects your loan application in my blog post here.

How do you calculate your personal Debt Service Ratio?

Formula to calculate your Debt Service Ratio :



Debt Service Ratio = Total Monthly Commitment / Total Net Income * 100

Calculating Your Net Income

Monthly Income

Salary + Fix Allowance = Gross Income

Deduction

EPF + SOCSO + PCB = Total deduction

Net income = Gross Income – Total Deduction



Your total debt includes all monthly financial commitment that you have to pay. Banks will be able to get this figure from your CCRIS report.

Calculating Your Monthly Commitment

Monthly Commitment

Your monthly commitment is the sum of monthly payment of your car loan, housing loan, personal loan, and 5% of credit card outstanding.

Example – Michael’s loan application

Income Amount Salary 4,000 Fix Allowance 500 Total Gross Income 4,500 Deduction Amount EPF (12%) 540 SOCSO 19.75 Total Deduction (559.75) Total Net Income 3,940.25 Monthly commitment Amount Car Loan 500 PTPTN 200 Credit Card (Outstanding RM 4000 * 5%) 200 New Housing Loan (RM 300,000) 1,500 (Estimated) Total 2,400 Debt Service Ratio Percentage Total Monthly Commitment / Total Net Income * 100 (2,400 / 3,940.25) * 100 60.9%

In the brief example above, Michaels’ DSR is worked out to be 60.9%.

Once the banks assess your personal DSR level, they will refer to their maximum allowable DSR threshold. Below is a rough average estimate of bank DSR threshold.

Income Range DSR % < RM 3000 60% RM 3,000 – RM 6,000 70% RM 6,000 – RM 10,000 75% > RM 10,000 80%

As you can tell, Michael’s income love is between RM 3,000 and RM 6,000. Therefore a maximum allowable DSR of 70% is acceptable. Michael should be able to get his housing loan application approved.

Internal banking guidelines

Don’t worry if your loan is rejected or approved at a high interest rate. Another bank may accept you as their guidelines may differ. In some cases if the banker is experienced and knowledgeable, they may be able to appeal and get it approved or at a lower interest rate.



Banks differ in policy when assessing a borrower profile, one bank may recognise 60% of rental income and another may assess 80%.



This also applies for commissions, some banks recognise 60% and another bank that I know recognises 100% of commission as income for Debt Service Ratio calculation.



The lesson here is to call and ask, the housing loan banker will be able to advice you whether your submission can be approved.

How do I make my profile more attractive to banks?

Prompt payment

Making prompt payment and decreasing your loan outstanding can help with your loan application.

Monitor your CCRIS report

Check your CCRIS report quarterly, it is a good practice and you get to monitor if there are any clerical issues (which have happened to me, my property loan was classified as personal loan) and keep yourself aware if there are any suspicious activity on your credit profile.

Lower your credit card utilisation

A good practice would be to keep your credit utilisation of your credit card to below 50%, if it is more than 70 – 80% chances banks may not approve you because of default risk. You may also wish to pay down your credit card debt as 5% of total outstanding contributes to your monthly commitment calculation.

In conclusion

To maximise your chances of approval by only making submission at banks that are most likely to approve your loan. Talk to your bankers and assess your personal profile before doing and actual submission.

I have personally experienced a rejection and an approval at a very low interest rate at the same time. Be sure to not submit to too many banks as that may raise a red flag, causing banks to reject your application altogether.