You’ve found your dream home, and now you’re navigating the financial maze to make it yours. Understanding key concepts like Loan-to-Value (LTV) and Debt Service Ratio (DSR) can be crucial.
| What is Loan-to-Value (LTV) How to calculate Debt-Service-Ratio (DSR) |
Imagine you’re in Aisha’s shoes: you’ve discovered the perfect apartment, but how much of its price can the bank finance? And with your current debts, how much more can you afford to borrow without overstretching your finances?
Dive into Aisha’s journey to unravel these concepts and see how they might apply to your own home-buying adventure.
1. What is Loan-to-Value (LTV) and how its function in Malaysia
Loan-to-Value (LTV) is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. Essentially, it represents the amount of the property’s price that is financed through a loan. In Malaysia, LTV is crucial as it determines the maximum amount a person can borrow to purchase a property.
For instance, if a bank has an LTV limit of 90% for a property worth RM500,000, the maximum loan amount you can obtain is RM450,000. The remaining RM50,000 will be the down payment you need to make.
In Malaysia, the Central Bank (Bank Negara Malaysia) has set LTV limits to curb excessive speculation in the property market. For instance, for third housing loans onwards, the LTV ratio is capped at 70%.
2. How to improve your CCRIS: Do’s and Don’ts for Malaysians
CCRIS (Central Credit Reference Information System) is a system that collects credit information on borrowers from financial institutions. A good CCRIS record is essential for loan approvals in Malaysia.
Do’s:
- Pay on Time: Always ensure that your loan or credit card payments are made on time.
- Check Your CCRIS Report: Regularly check your CCRIS report to ensure there are no errors.
- Limit Loan Applications: Too many loan applications can be seen as credit hungry behavior.
Don’ts:
- Avoid Defaulting: Defaulting on your loans will negatively impact your CCRIS.
- Don’t Max Out Credit Cards: Always try to maintain a balance below 70% of your credit limit.
- Avoid Being a Guarantor: If the primary borrower defaults, it will reflect on your CCRIS.
3. How to calculate your Debt-Service-Ratio (DSR) if you are a Malaysian
Read in-depth about Debt-Service-Ratio and it effect your home loan here!
Debt Service Ratio (DSR) is a tool used by banks in Malaysia to evaluate a person’s eligibility for loans. It shows the percentage of a person’s income used to service debt.
DSR Calculation:
DSR=(Total Monthly Income/Total Monthly Debt Obligations)×100%
For instance, if your monthly debt obligation is RM2,000 and your monthly income is RM5,000, your DSR is 40%.
DSR Calculator
Several banks in Malaysia are known for their expertise in assisting customers with DSR and LTV concerns. Maybank, for instance, offers personalized advice and has tools on their website to help customers understand and calculate their DSR and LTV.
5. Which bank in Malaysia has a low-interest rate?
Interest rates can vary based on numerous factors, including economic conditions and the type of loan. As of my last update in 2022, Public Bank Berhad was among the banks offering competitive low-interest rates for housing loans. However, it’s essential to shop around and compare rates from different banks to find the best deal.
Note: The financial landscape and regulations can change. It’s always recommended to consult with a financial advisor or the respective banks directly for the most up-to-date and personalized advice.
To make you understand easier, read below scenarios to understand better on how Aisha learn and understand the steps to buy her dream house by using the Loan to value (LTV) and Debt service ratio (DSR)
Aisha had always dreamt of owning a beautiful apartment overlooking the city skyline. After years of hard work and saving, she finally found the perfect place priced at RM500,000. Excitedly, she approached her bank to secure a mortgage.
Understanding LTV:
The bank officer explained to Aisha about the Loan-to-Value (LTV) ratio. The LTV determines how much of the property’s price she could finance through a loan. The bank had an LTV limit of 90%. This meant that Aisha could borrow up to RM450,000 (90% of RM500,000), and she would need to make a down payment of RM50,000 (the remaining 10%).
Aisha thought of it like buying a cake. If the cake represents the total value of the house, the LTV determines how much of that cake the bank is willing to ‘buy’ for her. The rest, she’d have to purchase herself.
Encountering DSR:
But there was another factor at play. The bank officer introduced Aisha to the concept of Debt Service Ratio (DSR). The DSR would determine if Aisha could afford the monthly repayments for the loan amount she was seeking.
Aisha’s monthly income was RM10,000. She already had some monthly commitments: a car loan costing her RM2,000 and a personal loan with monthly repayments of RM1,000. This meant her total monthly debt obligations were RM3,000 even before considering the new housing loan.
The bank officer calculated her DSR as follows:
DSR=(RM10,000/RM3,000)×100%
DSR=0.3×100%
DSR=30%
The bank had a DSR limit of 50%. This meant that Aisha could only commit up to 50% of her monthly income to all her debts combined. Given her existing obligations, she had a 20% buffer (50% – 30%) of her income, or RM2,000, available for the new housing loan.
The bank officer likened the DSR to a pie. Aisha’s income was the whole pie, and each debt took a slice of it. The bank wanted to ensure that Aisha still had enough pie left after all her debt commitments.
The Outcome:
After assessing Aisha’s LTV and DSR, the bank determined the maximum loan amount she could afford without overstretching her finances. While she was eligible for an RM450,000 loan based on LTV, her DSR indicated she could only afford monthly repayments equivalent to a loan of around RM400,000.
Aisha appreciated the bank’s thoroughness. It ensured she didn’t bite off more than she could chew. With a clearer understanding of LTV and DSR, she adjusted her expectations, negotiated with the property seller, and soon moved into her dream home without compromising her financial stability.
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