PETALING JAYA: Malaysia’s household debt is broadly expected to remain manageable in 2026, although it could pose an underlying risk if the US tariffs are prolonged and cause a slowdown in the global economy.
Economists, however, opined that despite external headwinds in the form of tariffs being a risk to household debt, it is not a concern at this juncture.
Malaysia faces a 19% levy on goods exported to the United States.
They attributed the nation’s strength in managing household debt to the robust economy, improving labour market conditions, low loan impairment ratios, borrowers’ healthy debt‑servicing capacity, and banks’ high risk management standards.
Strong domestic demand helped Malaysia outperform expectations, lifting fourth quarter of financial year 2025 (4Q25) gross domestic product (GDP) to a three-year high of 6.3% and full-year growth to 5.2%, above the government’s forecast.
This momentum pushed full-year 2025 GDP growth to 5.2%, up from the 5.1% achieved in 2024, putting it well ahead of the government’s official forecast range of 4% to 4.8%.
Based on official estimates, the economy is projected to grow between 4% and 4.5% for 2026.
RAM Rating Services Bhd senior economist Woon Khai Jhek told StarBiz that Malaysia’s household debt outlook in 2026 is expected to remain broadly stable and manageable, rather than materially worse than in 2025.
“While household debt growth is likely to continue, this is expected to be largely in line with income growth and supported by positive labour market conditions,” he noted.
Additionally, Woon said while consumption‑related credit grew at a faster pace, relevant data shows limited signs of financial distress.
He said their share of overall household data is also relatively modest at 15.2% as at end-June 2025 against 15.3% as at end-December 2024, thus resulting in relatively low risk exposure to the overall financial system.
As at end‑June 2025, household debt expanded at a steady annual pace of 5.9%, similar to the growth as at end-December 2024, driven mainly by housing and car loans.
As at June-2025, housing loans accounted for about 61% of total household debt, with housing and car loans together making up roughly 75% of total household borrowings. Importantly, he said borrowers’ debt‑servicing capacity remains healthy, with the median debt service ratio for newly approved loans stable at 41% as at end-June 2025, the same as in December 2024.
He said the household loan impairment ratio remained unchanged at 1.1 times during the period compared with December 2024.
The household debt-to-GDP ratio edged marginally higher to 84.8% as at mid-2025 against 84.1% in December 2024, and 83.8% in June 2024.
The household debt-to-GDP ratio indicates the total value of household debt as a proportion of a country’s total economic output or GDP in a given year.
A high ratio signals potential risks, such as a higher likelihood of economic slowdowns or financial instability, as it suggests households are heavily indebted relative to the size of the economy.
Woon said: “Looking ahead into 2026, risks to household debt will continue to stem mainly from cost of living pressures and potential external shocks.
“The household debt-to-GDP ratio could climb higher in 2026 if the anticipated tariff-induced economic slowdown materialises.
“We saw the ratio jump in 2020 amid the Covid-19 pandemic as the size of the GDP shrank, outpaced by the household debt expansion.”
Making a regional comparison, Woon said Malaysia’s household debt-to-GDP ratio remains higher than most of its Asean peers, but this needs to be interpreted in context.
At 84.8% of GDP as at mid-2025, Malaysia’s ratio is well above those of lower income Asean economies such as Indonesia (15.7%) and the Philippines (11.7%), but is broadly comparable to other more financially developed Asian economies.
“Higher household debt ratios typically reflect deeper financial markets, greater access to formal credit, and higher rates of homeownership.
“In Malaysia’s case, the elevated ratio is consistent with the demand for homeownership, as reflected by the composition of household debt where residential property loans make up 61% of overall household debt.
“Furthermore, household financial assets continue to exceed household debt by more than two times, providing ample buffers against adverse shocks,” he said.
Woon said Malaysia’s household debt level is also not exactly an area of concern at this juncture given the composition of debt, which is largely secured and asset‑backed, as well as by strong household balance sheets.
By contrast, he said unsecured and consumption‑related borrowings such as personal financing and credit cards remain a relatively small share of total household debt at about 15.2%, and this share has continued to trend lower over time.
As such, he said while Malaysia’s household debt level warrants ongoing monitoring, it does not currently pose a systemic risk to financial stability.
MARC Ratings Bhd chief economist Ray Choy expects the household debt outlook overall for this year to improve, supported by a firmer domestic growth environment.
He projects GDP growth to be around 4.5% to 5% in 2026, broadly above the long-term average of approximately 4.5%.
“Malaysia’s loan impairment ratios have historically remained low, and household impairment ratios are expected to remain contained at slightly above 1% as at end-2025.“
Meanwhile, debt service ratio (DSR) distributions remain broadly aligned with banking risk management frameworks, with the median DSR for outstanding loans at roughly one-third of income.
DSR illustrates how much of a person’s net income goes towards paying total monthly debt obligations.
It is a key metric banks use to assess loan affordability and financial health.
A lower DSR indicates better financial health.
Choy said current impairment ratios and DSR distributions suggest that, at the system level, household leverage remains broadly manageable.
“The primary risk inflection point would emerge if impairment ratios begin to trend upward rapidly in an environment of structurally elevated DSRs.
“At present, this risk is mitigated by Bank Negara Malaysia’s macroprudential guidance and banks’ internal underwriting standards, which collectively anchor borrower DSRs at prudent levels, typically below the 60% threshold in practice, with a median of around a third of income,” he noted.
Choy said Malaysia’s relatively high household debt-to-GDP ratio partly reflects financial deepening rather than financial stress.
“In structural terms, it is indicative of a mature banking system, broad mortgage penetration, and high accessibility to regulated forms of credit, rather than widespread reliance on informal or shadow financing channels,” he said.
Based on the latest data, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the household 2025, debt-to-GDP ratio stood at 84.8% in the first half of financial year 2025 which was marginally higher compared to 84.1% at the end of 2024.
Prior to Covid-19, he said household debt-to-GDP was hovering around 82% to 82.7% between 2017 and 2019.
As such, he said the household debt is stabilising but gradually growing on a lower trajectory.
Regarding whether the current government measures are sufficient to address high household debt and if further measures should be implemented, Mohd Afzanizam said the government has taken steps to ensure household debt is not blown out of proportion.
Beyond managing household debt, he said it is about understanding the reason why indebtedness has become an issue, adding that the important question the government should ask is whether higher household debt is a cause or a symptom.
“The way I see it, house prices have been persistently on the rise.
“For instance, the average house prices stood at RM494,383.54 as of 3Q25 which is slightly lower compared to RM501,772.00 in the previous quarter.
“However, house prices have been steadily rising since the beginning of the data series, which is at RM199,431 as of the first quarter of 2009.
“With wages not picking up at an ideal speed while the cost of living continues to rise, it goes to show something is off in the economy.
“It could mean the economy is inefficient, where resources are not being spent at the right place, and there is a lot of distortion in the economy that resulted in the prices of goods and services continuing to increase but wages not,” he added.
He said, therefore, the government really needs to look at the market and industries to see whether they have played their role effectively.
The role of government-linked companies (GLCs) at the federal and state levels, for instance, would need to be looked at.
“Yes, they are profitable, but have they helped to nurture and bring the micro, small, and medium enterprises? (MSME) into greater heights?
“What about their exit plans so that a true-blue private sector-led economy can function effectively and efficiently?
“Has corruption and abuse of power stalled the market economics that are supposed to be fair, transparent and efficient?
“Has the government spent enough on capacity building such as education, training, healthcare and infrastructure?,” he asked.
In that sense, Mohd Afzanizam there is no shortcut to economic prosperity.
But one thing is for sure: it has to be fair, transparent and efficient, he said, noting that is why economic and institutional reforms are extremely critical so that resources would be spent in the right place and yield higher productivity and income levels.
Choy said while household debt is currently well managed under active regulatory oversight, long-term resilience also depends on the ability of households to build financial capabilities and financially prudent habits.
He said there is value in encouraging financial planning from a young age, including introducing basic financial literacy in primary schools.
“In terms of policy, the focus should not necessarily be on suppressing household debt but on ensuring debt remains serviceable and sustainable and is used for the right purposes that yield positive outcomes.“
At present, Malaysia’s regulatory framework and banking risk management standards are broadly sufficient, with impairment ratios remaining low and DSRs generally maintained at prudent levels.
“Going forward, policy should remain targeted, particularly in monitoring higher-DSR segments, unsecured lending growth, and rapid access consumer credit such as buy now pay later or BNPL segments, while considering a broader national plan for enhancing financial literacy,” Choy reckons.
Summing up the household debt situation in the country, OCBC senior Asean economist Lavanya Venkateswaran expects the household debt-to-GDP to improve in 2026 versus 2025 reflecting better economic growth, a continued rise in wages and tighter labour market conditions reflecting supportive employment opportunities.
She said Malaysia’s household debt was 84.8% of GDP as of June 2025, with much of this debt backed by assets, namely some form of property, adding that the authorities are already monitoring vulnerabilities closely and nothing stands out as a particular near-term risk.
