How to improve your DSR and chances of getting a mortgage?

Debt Service Ratio, or DSR is one of the most important factors for bank to determine your mortgage eligibility.

It is calculated based on all your debt repayment obligations (from banks and non-banks) divided by your net income (after statutory deductions such as tax, EPF, SOCSO).

Generally, banks only lend up to 70% of your DSR after taking into consideration of the monthly instalments for the mortgage that you are applying.

To put things into perspective, let’s say you are earning a net income of RM5,000 a month while servicing a monthly commitment of RM1,500, you would be able to obtain a housing with RM2,000 monthly instalment with your DSR increasing from 30% (RM1,500/RM5,000*100%) to 70% (RM3,500/RM5,000*100%).

If you are going to apply for a mortgage to finance your property purchase, it is best to understand and improve the factors that will affect your DSR in order to increase the chances of getting the loan.

Here’s how:

1. Your income and employment status

Both your salary and net income are crucial when it comes to loan approvals and your employment status matters too, as banks will take into account your job stability which will have a direct impact on your repayment capability.

Tips to improve: Include all incomes sources you can gather – rental from property, investment returns, part time/free lancing income, etc to improve your profile. Meanwhile, try and build a long-term work history that showcases a relatively high degree of stability.

2. Your current financial commitment 

Bank will look at your housing loan, car loan, credit card, phone bills, personal loan and non-bank debts such as PTPTN and taxes payable in order to evaluate your DSR and repayment capability.

Tips to improve: The tip is very straight forward – reduce and pay off your debt as quickly as possible. You can focus on those with the smallest balance, such as credit cards and phone bills and try and paying off them first. As for those with a larger balance, pay the minimum on time and stop creating more debt. 

3. Your monthly expenditure

Living expenses is one of the factors that will affect your DSR and one of the ways bank estimates your monthly expenditure is through the cost of living of the area you are staying.

If you are living in urban areas such as Kuala Lumpur, the bank will envisage you are having a higher cost of living.

Tips to improve: If you are applying a joint loan, use the less-affluent address among the applicants as it could make a lot of difference. For instance, the mean monthly per capita consumption expenditure in KL stood at RM2,434 in 2019, while Selangor was only at RM1,730.