Understanding Your Debt Service Ratio (DSR) in Malaysia

The Gatekeeper to Malaysian Finance

In Malaysia, everything from a housing loan to car financing up to even personal borrowing seems to revolve around 1 critical number – the Debt Service Ratio (DSR). Unlike credit scores, which track your history of managing credit, DSR is used to assess whether you can handle debt right now based on income and what you already owe.

It is a critical metric to know because if you want to get a loan, you need to make sure your finances match what the bank expects. It’s important because it determines how much you can borrow, it’s essentially the gatekeeper to accessing Malaysian financial services.

What is DSR and Why does it Matters?

Debt Service Ratio (DSR) is the percentage of your net monthly income that is used to cover the monthly payments on all of your existing debt obligations including the new loan. It is calculated as:

DSR = (Total Monthly Commitments / Net Monthly Income) × 100%

Malaysian banks rely on DSR as a benchmark risk analysis to determine if you have the financial capability to borrow more money. Although there are general guidelines provided by Bank Negara Malaysia (BNM), it is the individual banks that determine their own acceptable DSR ceiling, which usually stands at around 60% although for borrowers with higher income or a stronger financial profile, some lenders are willing to stretch this ratio to up to 90%.

DSR is a measure of your ability to service a loan at the point in time whereas unlike CCRIS/CTOS credit reports, it shows how reliable you are by tracking your credit reliability.

DSR Calculation Breakdown: Income vs. Commitments

1. Net Monthly Income (Denominator):

Malaysian banks refer to your net income (after deductions of EPF and taxes) when they speak of DSR. If you have variable income (such as from commissions or bonuses), banks will typically average your earnings over the last 6 to 12 months and apply a conservative haircut for potential fluctuations in your pay.

2. Total Monthly Commitments (Numerator):

This covers all existing installment loans (house, car, personal), credit card minimum payments, overdraft interest and any Malaysian-specific obligations (such as PTPTN loan repayments or business financing installments). Banks also include the monthly repayment for the new loan which you would like to apply in computing your DSR.

Proactive Steps to Improve Your DSR

Having a high DSR can hurt your lending probabilities, but there are several steps you can take to improve it:

1. Reduce Monthly Commitments:

Begin by paying off or reducing short-term, high-interest loans like credit card balances or small personal loans. Settling a couple of small loans could release a ton of capacity, allowing you to take on new loans without stretching your DSR too far.

2. Increase Net Income:

If you do, include any other income streams (e.g. side hustle, freelance or rental money) in the paperwork as regular income that is taxed and can be verified by the bank. By supplying such proof for these sources of income, it is possible to boost your net monthly income and improve your DSR.

3. Consolidate Debt:

Refinancing several loans into a single house loan with lower monthly installments. This is a common strategy that many Malaysian borrowers use. When you consolidate debt, the DSR becomes more manageable because it lowers your total monthly obligations. If you’re facing financial strain, consider exploring a debt restructuring loan to help ease your repayment schedule and improve your DSR.

4. Extend Loan Tenure:

If you’re restructuring existing loans, think about stretching the repayment period. This will drive up total interest cost over the loan period but reduces monthly installments, and hence DSR will come down resulting in better loan approval possibilities.

Your DSR Action Plan

Don't think that one can't get a loan in Malaysia. You need to become good at mastering the DSR calculation. A high DSR doesn’t mean an automatic rejection of your application, but it raises some uncomfortable questions about reckless financial management.

Start by calculating your current DSR, and if you need assistance you can even speak to a personal loan consultant to help maximize your financial position. By paying down high-interest debts, increasing your net income, consolidating loans, or restructuring existing loans, you can improve your DSR and increase your chances of loan approval.