DSR Calculation: How to Calculate Debt Service Ratio (DSR) in Malaysia

In Malaysia, applying for loans, whether for a home, car, or personal use means you’ll come across a crucial term is Debt Service Ratio (DSR). Understanding DSR is essential, as it plays a big role in determining whether or not your loan application gets approved. But don’t worry, calculating your DSR is quite simple once you break it down. In this article, we’ll walk you through everything you need to know about DSR in Malaysia, how it’s calculated, and why it matters.

What is Debt Service Ratio (DSR)?

In simple terms, DSR is a measure of how much of your monthly income is used to pay off debt. Banks and financial institutions use DSR to assess whether you’re financially capable of handling additional loans. It’s basically a way for lenders to understand if you can take on more borrowing without being overwhelmed by your monthly commitment to existing debt.

The debt service ratio formula compares your total monthly debt payments to your income. A higher DSR means a larger portion of your income goes toward paying debts, which may reduce your chances of getting new loans approved. Conversely, a lower DSR suggests you have more financial flexibility and may be a more attractive borrower to banks.

Why is DSR Important?

In Malaysia, debt service ratio (DSR) is used by banks to reduce lending risks. By calculating your DSR, they can determine:

• Your financial stability – Ensuring you aren’t overloaded with debt.
• Reduce lending risk – Minimizing the chances of you defaulting on a loan.
• Promote responsible borrowing – Encouraging individuals to manage debt responsibly, so they don’t get in over their heads.

Most Malaysian banks have a DSR calculation threshold, with an ideal DSR bank typically falling between 30% to 60%, depending on the bank and loan type. However, this can vary. High-income earners may be able to secure loans with a slightly higher DSR.

It’s essential to manage your DSR carefully to avoid what’s known as a DSR burst. A DSR burst is when your debt ratio skyrockets due to unexpected financial obligations, making it difficult to stay within safe borrowing limits. This could lead to loan rejections or the inability to comfortably meet your monthly commitment. By calculating your DSR regularly, you can avoid situations where your DSR unexpectedly rises too high, making it difficult to secure further loans.

How to Calculate DSR in Malaysia?

The DSR formula is quite straightforward. Here’s the DSR formula:

DSR = (Total Monthly Debt Commitments / Total Monthly Income) x 100%

Let’s break it down into easy steps for the DSR calculation:

Step 1: List Your Monthly Debt Commitments

Include all your current loan repayments. This might include your home loan, car loan, personal loans, credit card minimum payments, and other financial obligations. For example:

• Home loan: RM1,500
• Car loan: RM800
• Personal loan: RM400
• Credit card minimum payment: RM300

Your total monthly commitment would be: RM1,500 + RM800 + RM400 + RM300 = RM3,000.

Step 2: Calculate Your Total Monthly Income

This includes your:

• Monthly salary
• Rental income
• Other regular income streams

For example, if your monthly salary is RM7,000, and you earn RM500 in rental income, your total monthly income would be: RM7,000 + RM500 = RM7,500.

Step 3: Apply the DSR Formula

Now, use the debt service ratio formula to calculate your DSR:

DSR=(7,500/3,000​)×100=40%

In this case, your DSR calculation is 40%, which is generally considered acceptable by most Malaysian banks. However, each bank has its own policies, and some may require a lower DSR, depending on your loan type and financial history.

If you want to make things easier, there are DSR calculators available online. These tools allow you to quickly input your income and debts to find out your DSR calculation. Simply enter your monthly commitment and total monthly income, and the DSR calculator will do the work for you. This can save time and give you a clear picture of your financial situation before you even apply for a loan.

How Banks Assess DSR Differently in Malaysia

Different banks in Malaysia have different standards for what they consider an acceptable DSR. Some banks are more flexible with higher-income earners or applicants who have additional sources of income. For example:

• Maybank and CIMB may have a higher DSR limit for applicants with strong financial histories, allowing DSRs up to 70% in some cases, especially for home loans.
• Public Bank may be more conservative, preferring a DSR below 60% for most loans but could offer flexibility for secured loans like mortgages.
• Islamic banks, such as Bank Islam, often consider a more holistic view of a borrower’s financial health, looking at disposable income after expenses, which might offer some flexibility even if your DSR seems a bit high.

Knowing the specific bank's DSR policy can help you target the right lender for your financial situation.

What is a Good DSR in Malaysia?

There isn’t one definitive DSR that works for all loans or banks, but here’s a general breakdown of debt service ratio Malaysia thresholds:

• Below 30%: Excellent! This is a low-risk range, and banks will likely approve your loan.
• 30% to 50%: Moderate. Most banks will view this as reasonable, but some may still be cautious, depending on the loan size.
• Above 60%: High risk. This might indicate you’re already overburdened with debt, making it difficult to get approval for new loans.

It’s important to remember that banks also consider your disposable income—what’s left after your debt obligations. If your income is high enough, some banks may approve loans despite a higher DSR.

Factors that Affect Your DSR

While the basic DSR calculation is straightforward, several factors can affect how your DSR is interpreted by banks:

• Type of income: Regular salaries are seen as more stable than commission-based or freelance income, which may influence how banks calculate your DSR.
• Joint applications: If you’re applying for a loan with a co-borrower (such as your spouse), banks will consider both incomes, potentially lowering your overall DSR.
• Type of loan: Personal loans may have stricter DSR requirements than secured loans, like home loans.
• Bank’s policies: Some banks may have different DSR limits. For instance, a DSR bank might allow a DSR as high as 70% for high-income borrowers or certain types of loans.

How to Improve Your DSR

If your DSR is too high and you're struggling to get a loan approved, here are a few ways to improve it:

• Reduce your debt: Pay off smaller loans, clear credit card balances, or refinance existing loans to reduce your monthly commitments.
• Increase your income: Consider taking on additional work or finding new income sources. This may take time, but it’s an effective way to lower your DSR.
• Apply for a smaller loan: Requesting a lower loan amount will reduce your monthly repayments, improving your DSR.
• Restructure loans: You can ask your bank to extend your loan tenure or reduce your interest rate, lowering your monthly repayment and DSR.

Common Mistakes People Make When Calculating DSR

Many people overlook certain debts when calculating their DSR, which can give them a false sense of financial security. Here are a few common pitfalls to avoid:

• Not counting minimum credit card payments: Even if you pay more than the minimum on your credit cards, banks will still include the minimum monthly payment in your DSR calculation.
• Forgetting about guarantor loans: If you’ve signed as a guarantor for someone else’s loan, that commitment will also be included in your DSR.
• Not considering variable interest rates: If your loan has a variable interest rate, your monthly repayment could increase in the future, which can impact your DSR over time.

Advanced Tips: How Malaysian Banks Look Beyond Just DSR

While DSR is an important factor, Malaysian banks often evaluate several other aspects before approving a loan. Here are a few key points that banks consider which aren’t always common knowledge:

1. Disposable Income After DSR

Even if your DSR is slightly higher than the bank’s threshold, some lenders will look at your disposable income—the money you have left after covering all your monthly debt commitments. For example, if you have a high salary, the bank might approve your loan even if your DSR is 60% because you still have a lot of disposable income left to cover living expenses.

2. Credit Score and Financial History

Banks will also assess your credit score and how well you’ve managed your past loans. Even with a good DSR, if your credit report shows late payments or defaults, it might affect your loan approval. On the other hand, a strong financial history might allow for a higher DSR threshold, as it proves you’ve been responsible with your debts.

3. Type of Income

Banks may treat different types of income differently. If your income is commission-based, inconsistent, or freelance in nature, banks may consider you a higher risk compared to someone with a steady monthly salary. This can affect how flexible the bank is with your DSR calculation.

4. Debt-to-Income Ratio (DTI) vs. DSR

While DSR focuses on monthly repayments versus income, banks also look at your debt-to-income ratio (DTI), which considers your total outstanding debt compared to your annual income. A low DTI can sometimes offset a high DSR, making it another key factor that lenders might take into account when evaluating your loan application.

My Loan Application Was Rejected. What Do I Do?

Getting your loan application rejected can be frustrating, especially if you’ve been planning for a big purchase. However, it’s not the end of the road. There are several steps you can take to improve your chances of success next time:

1. Review the Reason for Rejection

Banks typically reject loan applications due to high DSR or insufficient income. If the bank provides feedback, use this information to identify the issue. Sometimes, it may be due to a small error, or they might recommend reducing your debts to improve your DSR.

2. Work on Lowering Your DSR

If your DSR is too high, the best way to improve your chances of loan approval is by lowering it. Here are a few ways to do that:

• Pay off smaller debts: Reducing credit card balances or paying off small loans will lower your monthly commitments.
• Refinance existing loans: Consider refinancing a home or car loan to reduce monthly repayments.
• Consolidate debt: Merging multiple debts into one can lower interest rates and monthly payments, improving your DSR.

3. Increase Your Income

This might take time, but increasing your income can improve your DSR and affordability. Whether it’s through a salary raise, a side job, or passive income like rental properties, boosting your income will make you a more attractive borrower.

4. Adjust Your Loan Amount

Sometimes, your loan is rejected because the requested amount is too high. Consider applying for a smaller loan, which will reduce your monthly repayment and improve your DSR.

5. Check Your CTOS and CCRIS Scores

Another important factor that could lead to a loan rejection is your CTOS or CCRIS score. These two systems help banks check your credit history, including your past repayment behavior, unpaid debts, or even blacklisted status.

• CTOS (Credit Tip-Off Service): CTOS provides detailed credit reports on an individual's financial behavior, including any lawsuits, bankruptcy records, and trade references. A poor CTOS score due to bad credit behavior (e.g., late payments) can affect your loan approval.
• CCRIS (Central Credit Reference Information System): CCRIS is managed by Bank Negara Malaysia, and it tracks all your loans, payment history, and outstanding debts. If you have any missed payments or defaults, they will be reflected in your CCRIS report.

Both CTOS and CCRIS reports are important for banks in evaluating your risk as a borrower. If your loan is rejected, check both reports to ensure that all your credit information is accurate. Sometimes, clearing up small mistakes or outstanding payments can significantly improve your chances of loan approval.

Read also: What is CCRIS and How to Get CCRIS Report in Malaysia 2024?

6. Consult a Financial Advisor

If you’re unsure where to start, consulting with a financial advisor can be beneficial. They can help you restructure your debt, create a plan to improve your financial standing, and give you a clearer idea of your loan eligibility.

 

Understanding your Debt Service Ratio (DSR) is key when applying for loans in Malaysia. Knowing how to calculate DSR will give you a clearer view of your financial health and improve your chances of securing a loan. With tools like a DSR calculator, you can quickly assess whether your DSR is in a healthy range before applying for any financing.

It’s also crucial to consider affordability beyond your DSR to ensure that you can comfortably manage your loan repayments without putting yourself under financial stress. Additionally, monitoring your CTOS and CCRIS scores is essential, as they play a significant role in loan approval.

Avoid the dangers of a DSR burst by keeping your debts under control and understanding your financial situation. But if your DSR Burst, don’t panic! There are ways to reduce it, such as paying off existing debt or increasing your income. Now that you know how to calculate DSR and why it matters, you're ready to manage your loans and financial future with confidence!

 

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