What is Debt Service Ratio (DSR) ?
The DSR meaning can be put simply as “a method used by banks to calculate whether or not you can afford the loan you’re applying for”.
In terms of a home loan, this formula essentially helps the bank estimate how much you can afford to fork out for your monthly installments.
How Does Bank Counts DSR ?
In general, the formula used to calculate an individual’s DSR is Total monthly commitments including the home loan you’re applying for, divided by Total net income (after tax and EPF deduction etc) You should try to maintain a DSR range of 30% – 40%.
Calculate your DSR using this equation:
Total Monthly Commitments / Total Net Income X 100% = Debt Service Ratio
Net Income in payslip: RM5.000
Total Monthly commitment is RM2,000 (including PTPTN, Personal Loan, ASB, Credit Card, Car Loan)
New Housing Loan monthly repayment: RM1,500.
Step 1. Sum up the total commitment with the monthly repayment of the loan that you plan to take (RM2,000 + RM1,500 = RM3,500).
Step 2. Divide it by your NET INCOME RM5,000 (RM3, 500/ RM5,000 = 0.7), and multiply by 100 (0.7 x 100 = 70 %).
Thus, your DSR is 70% which is consider HIGH.
As mentioned, your DSR should be no more than 30 – 40%. And though many banks might still consider your loan application even with a DSR of 70%, it’s better to play safe and prevent a history of one too many loan rejections.
Improving your DSR starts with either reducing your debt or increasing your net income. So start rushing to pay off big-ticket debts!
You can also consider consolidating your debt for unsecured loans (not tied to any collateral) like PTPTN and credit card bills.
This is an easier way to manage all your debt and might actually even help you save on interest.