How to Improve Your Loan Approval Chances: Debt Service Ratio

An important consideration for financial institutions in evaluating your suitability for a home loan is your debt service ratio (DSR). In Malaysia, a DSR is usually calculated as the percentage of total debt payments over income. Your debt service ratio represents your ability to service or handle your current debt. The lower your DSR percentage, the stronger a loan applicant you are.
Acceptable DSRs vary from lender to lender and can range from 30% to 60% with majority of financial institutions maintaining a 40% DSR. This does not mean that your loan will be approved if your DSR is below 40%. Financial institutions also evaluate other factors such as your credit repayment track record and the favourability of the collateral. However, a good DSR makes it more likely that you will get the loan you sum you wish to borrow.


Debt Consolidation

One of the first steps towards minimising your monthly debt repayments is to consolidate your debt. Often financial institutions in Malaysia do not only take into account your loan balances when calculating your debt service ratio, they also take into account the available credit you have.

For example with credit cards, financial institutions can attribute a sum between 1% to 5% of your total credit card limit (on all cards) towards your DSR calculated, regardless of whether you actually use some of the cards or not. So, if you have a total of 4 credit cards with a total credit limit of RM40,000.00 some Lenders may assume that you will spend anywhere between RM400.00 to RM2,000 per month(being 1%- 5% of the total limit) and this assumed spending may be added on to your estimated total monthly debt repayments. A small factor such as this make affect your DSR calculations and ultimately your credit score.

Consolidate your debt by having a debt reduction plan to quickly repay or settle some of your smaller loans (e.g. an overdraft that has never been utilized, or a car loan with a small sum outstanding) and cancel the credit cards you don’t use. It may be good advice to settle the debt with the highest interest first but make sure you make the minimum payments of other debts as well.

Financial institutions generally ascertain and analyse your debt through your Central Credit Reference Information System (CCRIS) report. All financial institutions report to Bank Negara Malaysia (BNM) on information on their loans. This information is then collated into reports and made available for financial institutions to access. As information is reported once a month, ensure that the debt you intend to settle is done at least one month prior to your home loan application. For example, if you own an extra car which is still under hire purchase which you intend to sell, it is worthwhile doing so before you apply for your home loan.

If you have other income sources besides your monthly salary, declaring your income sources to the financial institution may improve your DSR. Some financial institutions will take income other than your main source of income into consideration when calculating your DSR. Other income include rental, interest income, capital gains from mutual funds, insurance commissions, director fees, share capital gains or dividends or profits from companies. Ensure that you furnish the financial institution with proof of your secondary income sources. This information include rental or tenancy agreements, at least 3 months of monthly commission statements, dividend statements or audited financial statements of companies you may be involved in.

Also consider joint applications. In general, income from applicants will be added together when calculating DSR. However, monthly debt obligations of joint applicants will also be included so ensure that your joint applicants have a strong DSR.

A longer loan tenure also assists in DSR calculations due to the lower monthly repayments required. Recall, DSR is an examination of your monthly commitment as a percentage of your declared income.


Benefits of having a good DSR

Your DSR is usually evaluated in tandem with the strength of your collateral property, your credit repayment track record and other factors. If these factors are positive, financial institutions will look at your loan application more favourably if you have a good DSR. The benefits of being a strong loan applicant is firstly that you will be likely to get the home loan you want and your loan application will be processed in a shorter time frame than weaker applications. You may be able to also negotiate for better terms and conditions on the loan such as a slightly lower interest rate (or matching of an interest rate offered by another financial institution), fee waivers or for the bank to absorb some of the loan entry fees.

Finally, maintaining a good DSR is good practice to ensure that you are not over burdened with debt obligations, you will be likely to meet you debt repayments as and when they fall due and therefore maintain a good credit rating and standing with financial institutions.