Your Commitments and Debt Servicing Ratio

Another aspect you have to consider when applying for a housing loan is to determine your monthly commitments against your salary or income. In banking terms, this is repayment capability which we call “Debt Servicing Ratio”.

Debt Servicing Ratio refers to your ability to pay your debts from the income the your are earning, where the Bank will forecast if you are able to effectively pay your debts on time. A ratio is usually determined for each type of loan, and it is compared against your income.

For example, your debt servicing ratio should not exceed a certain percentage, usually 33.0%. How this is calculated is that all your “secured” loans monthly instalment with the Bank is lumped-up, and then it is divided against your salary. If the result is above the 33.0%, the loan may be rejected. If it is below 33.0%, it can be approved.

Generally, the basic rule of thumb of the Debt Servicing Ratio is based on this rationale:

  1. 33.0% of your salary will be used for your daily expenses.
  2. 33.0% of your salary will be used for your bills and taxes.
  3. The remaining 34.0% is therefore available for payment of loans (car and house).

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If your basic salary is RM4,000, then your total instalment for your proposed house purchase, should not be more than RM1,333 (about 33% of your salary). This calculation is applicable if ALL your loans is in the SAME bank i.e. car loan and housing loan in Bank A. Any instalments you have in Bank B, will not be included into this calculation. Unsecured loans, such as credit cards or personal loans, are usually excluded as well.

However, there are some banks that do take into consideration the instalments that you are paying other banks as well, in their calculation (usually practiced by banks that are overly conservative). For these type of Banks, the Debt Servicing Ratio is increased from 33% or 40% to maybe 66% or 70%, which will qualify you for an approval. In such cases, CCRIS will play a more important role as your money available is calculated as tighter with the new proposed loan commitment. Behaviour of your CCRIS is looked at more closely for this type of ratio.

Nevertheless, Banks will try their best to approve your application if all other criteria are met. If your proposed monthly house instalment exceeds the approval ratios, the Bank will try to adjust your instalment as low as possible so that your ratio is within approval limits. What this mean is that the Bank will offer you a lower margin of financing.

But at least, you will have a better chance for approval, although your financing amount is lower. If you can afford to put up that extra amount to the developer/seller, then your application can proceed for approval.

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