How To Calculate My DSR For My Home Loan

Understanding how bank approves your loan would ensure you a higher chance of buying your dream house. Debt Service Ratio (DSR) is commonly utilised by financial institutions to determine if an applicant should be granted the loan he/she has applied for. DSR takes into consideration the applicant’s monthly financial commitments against his income.

The rules and policies that go into the calculation of DSR differ slightly across banks, but the general formula for DSR is:

DSR = (Total Commitment ÷ Total Income) x 100

The differences in rules and policies are usually on income type and sources. For instance, Bank A may use nett income (to calculate DSR while Bank B uses gross income). Bank C may consider only 50% of rental as income but another bank may be more ‘generous’ and places the entire rental amount as your income.

Let’s help you deep dive in calculating your DSR, by using James as an example. James wants to apply for a housing loan from Bank A, and has the following income and commitments:

1. A) Total Commitment

Home loan (RM800) + car loan (RM450) + credit card (RM150)

James’ total monthly commitment = RM1,400

1. B) Total Income

Basic salary (RM3,000) – statutory deductions (EPF: RM330 + SOSCO: RM14.75)

James’ nett income = RM2,655.25

(Assuming that the bank uses nett income in its DSR calculation)

1. C) DSR = (Total Commitment ÷ Total Nett Income) x 100

DSR = (RM1,400 ÷ RM2,655.25) x 100 = 52.7%

Bank A has a further policy for those who earn a nett income of RM5,000 and below – their commitments must not exceed 60% of their nett income. In this case, James’ DSR of 52.7% qualifies for a loan from Bank A.

So, what is the ‘qualifying’ DSR?

The most commonly accepted DSR among banks is 60%-70%. If an applicant’s DSR exceeds the bank’s comfort range, the bank may deny the loan approval. However, there are also instances when a loan application is rejected even if you are seemingly qualified to take on a loan based on your DSR.

How to improve your DSR?

If your loan application is turned down, don’t lose hope just yet.

For instance, if your first bank denies your loan application, do not stop there. You may submit your application to another bank or even a few more. Remember that each bank has its own DSR criteria, so being rejected by one bank doesn’t mean that every other bank would turn you down too. Furthermore, submitting your loan application to multiple banks also allow you to ‘shop’ for the best interest rates.

Earning more is easier said than done, but what’s simpler is to have a clean credit history when comes to monthly repayments of credit card bills and other loans. Alternatively, you can choose to consolidate your multiple repayments into one loan. Not only does a consolidated loan help to save on interest, but it also stretches your monthly repayments into a manageable level. Last but not least, reduce the number of credit cards you owned. If you can, minimise the number of loans as well.

You may want to know the few main reasons why banks reject a particular loan application. Also, if you are any of the CCRIS or CTOS blacklisted applicants, do read up on what you need to be aware of before applying for loan.