Debt Service Ratio - Penang Estate

Debt Service Ratio ( DSR )

What is DSR?

We have a client viewed A Condo and paid booking with 1% of the property price. The Buyer very happy and applying loan.

Few weeks later, the buyer was upset. The loan cannot approved due to their DSR burst. So, today let us find out what is DSR?

What is DSR?
How to calculate DSR?
What can we do to make our DSR nice?

1. what is dsr

DSR stands for Debt Service Ratio. It is a financial metric used by banks to assess an individual’s ability to repay a loan. DSR compares an individual’s monthly debt obligations (such as loans, credit card payments, and mortgages) to their monthly income.

A lower DSR means that the borrower has more disposable income after covering their debt commitments, making them a lower risk for lenders. Most banks have a specific threshold for DSR, usually between 40% to 80%, and exceeding this limit can result in loan rejection.

In short, the DSR helps ensure that borrowers do not take on more debt than they can reasonably handle.

2. how to calculate dsr

The formula for DSR is:

DSR = [(Total Monthly Debt Obligations + Mortgage loan / Nett Income ] x 100

Total Monthly Debt Obligations: Includes all monthly loan payments (personal loans, mortgages, credit cards, car loans, etc.).
Mortgage Loan : Monthly instalment of your loan for the property you going to purchase.
Nett Income : Total income after taxes and other deductions.

For example

Your nett income RM 8,000 per month. Your total monthly commitments adds up to RM 3,000 and you’re trying to apply for a loan with a monthly repayment of RM 3,200.

Total Monthly Debt Obligations : RM 3,000
Mortgage loan : RM 3,200
Nett Income : RM 8,000
( RM 3,500 + RM 3,200 ) / RM 8,000 = 0.775 x 100 = 77.5%

*In this situation, depends on the bank.

3.What is affecting your dsr scoring?

Monthly debt obligations that affect your DSR typically include:

Mortgage Payments: Principal and interest on home loans.
Rent Payments: If you’re renting, your monthly rent is included.
Car Loans: Monthly payments on any auto loans.
Credit Card Payments: Minimum monthly payments or revolving debt payments.
Personal Loans: Payments on unsecured loans or lines of credit.
Student Loans: Monthly repayments for educational loans.
Child Support or Alimony: Any legal obligations to pay support.
Other Installment Loans: Payments on any other loans (e.g., medical loans, furniture loans).

All these obligations are considered when calculating the DSR, impacting how much additional debt you can take on, such as for a new mortgage or personal loan.

4. how can I improve my dsr

Improving your Debt Service Ratio (DSR) is crucial when applying for a loan. Here are several strategies to enhance your DSR:

Increase Your Income: The higher your monthly income, the lower your DSR will be. You could seek additional sources of income like a side business, freelancing, or investments.
Pay Off Existing Debts: Clear outstanding loans and credit card balances before applying for a new loan. This reduces your debt commitments and lowers your DSR.
Consolidate Loans: Combining smaller loans into one larger loan with a lower interest rate or longer repayment tenure can reduce your monthly repayments, thus improving your DSR.
Extend Loan Tenure: Choosing a longer repayment period for the loan will reduce your monthly installments, making your DSR more favorable.

*By managing your finances wisely, you can improve your DSR, making it easier to get approved for a loan.

Note !!!

While the Debt Service Ratio (DSR) measures your debt against your net income and determines your eligibility for a home loan, it’s essential to recognize that eligibility and affordability are two distinct concepts. The DSR doesn’t account for other monthly expenses such as groceries, utilities, or lifestyle costs. These non-fixed expenses can significantly impact your ability to afford a property, especially in a country like Malaysia, where the cost of living can vary greatly depending on location.

Moreover, when purchasing a property, there are numerous additional fees that many buyers overlook, and these can add up quickly. These include the transfer of ownership title, legal fees for the Sale and Purchase Agreement (SPA), SPA stamp duty, and the largest upfront cost — the down payment.

Understanding the difference between qualifying for a loan and truly affording a home ensures that you’re not overstretching your finances once all expenses are considered.

5. My Loan Application Was Rejected. What Do I Do?

If your loan application was rejected, don’t be discouraged; there are several steps you can take to improve your chances in the future. If the rejection stemmed from your Debt Service Ratio (DSR), consider reducing your current debts and consolidating loans to lower your overall obligations. However, if your DSR is healthy and you still faced rejection, it may be due to the specific bank’s policies. Each lender has its own guidelines regarding acceptable DSR levels, so it’s worth researching different banks to see which ones align better with your financial situation.

Additionally, minor errors can lead to rejection, such as submitting outdated documents, filling out forms incorrectly, or attaching unclear copies of your ID. To avoid these pitfalls, double-check all your documents and consider having a trusted friend review them before submission. By taking these proactive measures, you can enhance your application and increase the likelihood of approval.

Summary

The Debt Service Ratio (DSR) is a crucial metric used by lenders to assess a borrower’s ability to repay a loan. It is calculated by dividing total monthly debt payments by gross monthly income. A lower DSR indicates better financial health. However, DSR focuses solely on debt relative to income and does not account for other essential expenses, such as living costs and property-related fees.

When applying for a loan, it’s vital to distinguish between eligibility (based on DSR) and affordability (considering all expenses). If a loan application is rejected, it could be due to a high DSR, bank-specific policies, or even minor errors in documentation. To improve your chances of approval, consider reducing debts, researching multiple lenders, and ensuring all application materials are accurate and clear.