When you apply for home financing, the bank will look at two main things: your income and your commitments. From there, the bank will calculate your home loan eligibility. To calculate your eligibility, the bank will use the method of debt-to-income ratio, also known as Debt Service Ratio (DSR).
What is Debt Service Ratio (DSR)?
Debt Service Ratio (DSR) means the ratio of your debt to your net income (after deducting EPF and SOCSO). DSR becomes a benchmark for banks to measure your ability to make home financing.
Debt Service Ratio (DSR) Limit
Roughly, the debt service ratio (DSR) limit for all banks in Malaysia is:
- 60% for individuals earning below RM 3000 net
- 70% for individuals earning above RM 3000 net
However, the DSR limit varies for each bank. Some banks offer DSR up to 80% for those earning RM 5000 and above. In any case, refer to the bank first before you apply for home financing.
For example, Aidil is a private sector employee with a net salary of RM 3500 per month.. He has no commitments.. According to the above criteria, the DSR limit set by the bank for Aidil is 70%. Therefore, Aidil can make home financing with a monthly installment limit of:
- RM 3500 x 70% = RM 2450
To get an estimate of the house price he is eligible to buy, multiply Aidil’s monthly installment limit above by 200.
- RM 2450 x 200 = RM 490,000
Aidil is eligible to apply for home financing priced at RM 490,000 and below.
Net Disposable Income (NDI): Important Component in DSR
Net Disposable Income (NDI) is the balance of income after deducting the DSR limit. For example above, Aidil’s monthly installment limit is RM 2450. His remaining income after deducting the monthly installment limit is RM 3500 – RM 2450 = RM 1050. This is what is meant by Net Disposable Income (NDI).
The amount of NDI depends on the bank. Your home financing application will also be rejected if you do not pass this minimum NDI requirement.
For example, Aidil wants to apply for home financing from bank A. The minimum NDI amount set by bank A is RM 1500. Based on the calculation above, Aidil’s NDI is RM 1050 and does not pass bank A’s requirement.
Therefore, the way to calculate his home buying eligibility will be calculated based on the following formula:
- (Net salary – NDI) X 200 = Maximum House Price Aidil is Eligible to Buy
Aidil’s housing loan eligibility is:
- (RM 3500 – RM 1500) X 200 = RM 400,000
Based on the above calculation, Aidil is eligible to apply for home financing priced at RM 400,000 and below at Bank A.
I need to remind you that the above calculation is partially complete. There are several other checklists that need to be considered in calculating your home loan eligibility. Refer to the next section.
Checklist Before Calculating Home Loan Eligibility
Here is a mandatory checklist needed to calculate home loan eligibility:
Income
- Net salary fixed allowances
- House rental income
- Overtime
- Tabung Haji / ASB dividends
For overtime income, it is calculated based on the average income for 6 months. From there, the bank takes between 50% – 80% of the average income as an addition to your monthly income.
Income from house rentals can also be counted as full additional income. However, some banks take 80% of house rental income as additional income.
For Tabung Haji and ASB dividends, it is calculated based on the average dividend received for 12 months.
In conclusion, for net salary and fixed allowances, they are calculated in full. For house rental income, overtime and Tabung Haji/ASB dividends, the calculation of additional income depends on the bank. Therefore, refer to the bank for more information.
Monthly Commitments
Monthly commitments referred to are your commitments with registered financial institutions such as banks. In addition, this commitment record is stated in your CCRIS.
- Home Financing
- Personal Loan
- PTPTN
- ASB Financing
- Car / motorcycle loan
- Credit card
- Others
Full Formula for Calculating Home Loan Eligibility
- List all income.
- List all commitments.
- Calculate the applicant’s monthly installment limit (DSR) check NDI conditions.
- If NDI conditions are not met, change the calculation formula.
- Subtract the monthly installment limit from existing commitments.
- Calculate maximum housing loan eligibility (multiply remaining monthly installment by 200).
Example 1: Guide to Calculate Home Loan Eligibility for Applicants Who Pass NDI Conditions
Aidil is a private sector employee in Kuala Lumpur. He wants to apply for bank financing from Maybank. The NDI requirement from Maybank is RM 1500.
Step 1: List all of Aidil’s fixed monthly income
Income
- Net Salary: RM 4,500
- Fixed allowance: RM 1500
- Total: RM 6,000/month
Step 2: List all of Aidil’s monthly commitments
Monthly commitments:
- Personal Loan: RM 200/month
- PTPTN: RM 100/month
- ASB Financing: RM 1000/month
- Car / motorcycle loan: RM 600/month
- Credit card: None
- Others: None
- Total Commitments: RM 1,900/month
Step 3: Calculate monthly installment limit (DSR) check NDI conditions
- Aidil’s DSR Limit: 70%
- Monthly installment limit: 70% x RM 6,000 = RM 4,200
- Net Disposable Income(NDI): RM 6000 – RM 4200 = RM 1800
Based on the above calculation, Aidil passes the NDI requirement set by Maybank. Therefore, the formula for calculating the maximum monthly installment does not need to be changed.
Step 4: Subtract monthly installment limit from existing commitments
- RM 4200 – RM 1900 = RM 2,300
Step 5: Calculate Maximum Housing Loan Eligibility
- RM 2,300 x 200 = RM 460,000
Based on the above calculation, Aidil is eligible to buy a house priced at RM 460,000 and below.
Example 2: Guide to Calculate Home Loan Eligibility for Applicants Who Do Not Pass NDI Conditions
Khairul is a private sector employee in Kuala Lumpur. He wants to apply for bank financing from Public Bank. The NDI requirement from Public Bank is RM 1300.
Step 1: List all of Khairul’s fixed monthly income
Income
- Net Salary: RM 3,200
- Fixed allowance: RM 300
- Total: RM 3,500/month
Step 2: List all of Khairul’s monthly commitments
Monthly commitments:
- Personal Loan: RM 200/month
- PTPTN: RM 100/month
- ASB Financing: None
- Car / motorcycle loan: RM 600/month
- Credit card: None
- Others: None
- Total Commitments: RM 900/month
Step 3: Calculate monthly installment limit (DSR) check NDI conditions
- Khairul’s DSR Limit: 70%
- Monthly installment limit: 70% x RM 3,500 = RM 2,450
- Net Disposable Income(NDI): RM 3,500 – RM 2,450 = RM 1050
Based on the above calculation, Khairul does not pass the NDI requirement set by Public Bank (RM 1,300). Therefore, the formula for calculating the maximum monthly installment needs to be changed.
- New monthly installment limit = Existing monthly installment limit – bank’s NDI requirement
- RM 3,500 – RM 1,300 = RM 2,200
Step 4: Subtract monthly installment limit from existing commitments
- RM 2,200 – RM 900 = RM 1,300
Step 5: Calculate Maximum Housing Loan Eligibility
RM 1,300 x 200 = RM 260,000
Based on the above calculation, Khairul is eligible to buy a house priced at RM 260,000 and below.
For both calculations above, I did not include additional income such as overtime and house rental income because the calculations vary according to the bank. My suggestion is to refer to the bank for more information.
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