WE all need a roof over our heads. But some go further by depending on property as a means to accumulate wealth.
Chances are, for many of us who want to be owners or landlords, a housing loan is required to help us get a slice of the property pie.
However, obtaining a loan these days is tied up to your debt service ratio (DSR), which the Association of Banks Malaysia attributes as one of the main reasons for rejecting loan applications.
Used as a measure of an applicant’s ability to repay a loan, a high DSR indicates a red flag from the bank’s point of view as it means an applicant’s existing borrowings and repayment is high relative to his income.
According to loan comparison site Loanstreet, it’s a myth that banks will only lend you 1/3 of your gross income or up to 70% of your DSR.
It states that between different banks, there can be major differences in the final DSR amount that is calculated.
This is because each has its respective calculation method for income and commitment recognition.
It is not uncommon to have up to 20% difference when different banks calculate the DSR for the same person.
How do you keep your DSR to a more manageable level?
There are two key ways to do this – reduce one’s debt and increase income.
Mortgage product developer JH Lok points out that some of the most practical ways to lower one’s DSR is to review your existing commitments.
Then, perform a debt-consolidation exercise to pare down the number of outstanding loan accounts and redeem the more expensive borrowings, he advises.
He says one should also consider disposing under-performing properties, or those with limited upside or negative cash flow. This could reduce your loan exposure.
You could also raise cash through other sources. “Explore approved EPF withdrawals and/or instalment repayment schemes, especially for your “own-stay” home first.
“This is because it is the most important piece of property, presumably not generating income and therefore lowers the DSR with greater impact when the loan is pared down,” he says.
Alternatively, you can take on a smaller loan such as going for a joint loan when buying a property, suggests Junirah
Alternatively, you can take on a smaller loan such as going for a joint loan when buying a property, suggests Junirah Jamil, Loanstreet's operations and customer service manager.
Reducing debt exposure aside, one can also look at boosting the income equation.
“It’s good to have proper and comprehensive supporting documents if you have additional income, especially if a particular debt is generating some returns for you.
“If you have additional income, you may be able to use it to increase your income tier and procure a better DSR cap,” says Junirah.
In AKPK’s view, a debt service ratio within 40% is generally a good benchmark, says Chong
Credit Counselling and Debt Management (AKPK) financial education trainer Dr Desmond Chong points out that one can also have a second job.
“There are so many things you can do, such as being a Uber or GrabCar driver.
“You can also set up a small business as there are so many online platforms for you to do so,” he says.
Improving your net worth by reinvesting your income from investments and savings may also stand you in good stead.
“When banks ask for collateral when you apply for a loan, you can use your asset to back it up and get a higher sum,” he says.
An industry player shares a similar view, pointing out that those with business and rental income can restructure the loan to first-party company borrowings (buying a property and taking a loan under the company) via sustainable investment holding companies and other business entities.
That way, he says, they don’t have to use their individual credit limit/DSR. However, he cautions that running a company comes with its costs too.
Beware of some not-so-good ways to lower your DSR. Overlapping an existing loan with another is one such example, says Junirah.
“This is where one takes out a new loan to pay off an older loan, thinking that if they do so, they can somehow extend the tenure.
“What they fail to realise is that it is different from debt consolidation. You’re not actually lowering your DSR, you just got yourself into a whole new commitment with a “refreshed” tenure, so you’re back to square one,” she cautions.
An industry player concurs and says other bad ideas include signing up for easier-to-qualify loan cover, or short-term replacement loans such as using personal loans to cover long-term loans with cheaper interest rates.
He also does not endorse using multiple loan submissions concurrently to take advantage of bank application loopholes or falsifying income documents to support one’s loan application.
He advises against shifting to non-financial institutions that usually charge higher interest to avoid being detected in the banking radar system.
As such, one should steer clear of taking hire-purchase loans from the internal financing of credit companies of car dealers/franchise-holders, or full internally-financed property from the developer which typically come with higher interest rates.
Strike a balance
Debt may be inevitable when buying a big-ticket item like property. Above all, strike a balance between financial prudence and wealth accumulation.
Junirah points out that purchasing multiple properties at one go just to grow one’s wealth or improve one’s financial standing may sound like a good idea, but many fail to consider the amount they will have left.
“If you barely have any cash left over for your own survival, then you have just made a terrible financial decision,” she says.
She advocates starting small for those who have limited financial capacity.
One should ideally buy a non-luxurious property at an upcoming location with ample amenities and infrastructure nearby, then check if the rental exceeds monthly instalments.
The excess cash acting as your passive income can actually raise your maximum threshold and allows you to borrow more, she says.
“For example, your monthly instalment is RM1,400, whereas the property rental is RM1,500/month.
“You’re earning RM5,900/month. The additional RM100 will allow you to hit the RM6,000 threshold, which means that instead of the 60% maximum allowable DSR, you may now be eligible for 70% (depending on each bank’s respective credit guidelines, which can vary considerably).
“Since you can borrow more, now you can proceed to purchase that second property, and gradually build your wealth,” she points out.
Don’t max out your DSR
Some property gurus have been advocating zero down payment and a high cash-on-cash return – a strategy that may appeal to aspiring property owners who are cash strapped.
A lower down payment may require less upfront cash, but it results in higher debt and higher DSR (should the income level stay the same).
Should one go for the maximum allowable DSR then?
Loanstreet’s operations and customer service manager Junirah Jamil says this is contingent upon a person’s capacity to manage funds to promptly service monthly instalments without much struggling.
Also, it depends on whether the remaining cash is enough for the person’s lifestyle expenses and other hidden commitments.
“However, a person might want to consider a few things, such as whether you have enough savings for an emergency, as well as your investment and insurance, or if you have a future plan in the short- and long-term, such as upgrading your lifestyle and changing your career,” cautions Junirah.
Mortgage product developer JH Lok agrees that it is not advisable to maximise one’s DSR, especially when signing up for floating rate mortgages.
“The repayment is subject to adjustments according to base interest rate fluctuations.
“Also, you should leave some room for the next or other investment borrowings,” he says, adding that depending on the property’s performance, loans taken on it can also become bad debts.
Lok observes that there are two extremes – for genuine home owners, the standard and recommended DSR is usually 33% or 1/3 of the gross income, which was later reclassified as disposable or nett income.
However, property flippers, investors or even business owners with own-use premise may level it up to above 80% or 100%, depending on the cash flow gap of their property/business income.
“On balance, especially when adopting the ‘cash flow-investing’ model, perpetual borrowings are technically allowed while holding the DSR at a fixed ratio.
“The theory is just to ensure that property holdings generate income by itself to sustain the DSR at a constant or lower level.
“However, this method must be carefully executed, as any vacancy period may have implications on repayment capabilities.
“So, it is still wise to maintain a safety margin with this approach,” he says.
Credit Counselling and Debt Management (AKPK) financial education trainer Dr Desmond Chong points out that from AKPK’s point of view, a DSR that is within 40% is generally a good benchmark, even though some banks may allow higher.
However, he acknowledges that it is very difficult to say whether one’s DSR should be 60% or 80% as income plays a significant role in this equation.
It is more relevant to see if you have enough to support your expenses after paying your monthly commitments.
“If your income is RM100,000 a month, a DSR of 80% means that you still have RM20,000 (20% of RM100,000) to support your living expenses.
“By contrast, if you earn only RM5,000 a month, maxing up your DSR to 80% means that you only have about RM1,000, which makes it difficult to support yourself once you pay off your loans every month,” he says.
It is no surprise then that the Association of Banks Malaysia said last month that the rejection of housing loan applications cuts across all income ranges.
However, this is especially prevalent among the lower- to middle-income groups due to their smaller disposable incomes relative to new and existing monthly commitments.