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What to know about Base Rate (BR), Base Lending Rate (BLR) and Standardised Base Rate (SBR) when selecting a housing loan?

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Many Malaysians are still confused over the current Standardised Base Rate, which is the common reference rate for all financial institutions in Malaysia starting 2022. In this article, we dissect how it’s different from the previous Base Rate and Base Lending Rate and explain how they affect your housing loan.

bank-negara-malaysia-bnm
© Abdul Razak Latif | 123rf

Effective 1 August 2022, the Standardised Base Rate (SBR) replaced the Base Rate (BR) as the main reference rate for new retail floating rate loans, residential property loans included.

The Base Rate was used as the main reference rate for retail floating rate loans such as residential property loans since it replaced the Base Lending Rate (BLR) starting on 2 January 2015.

Why The Change From BLR To BR?

According to Bank Negara Malaysia (BNM), the BLR has become less relevant as a reference rate for loan pricing.

The nature of the BLR system which employs a fixed rate across all banks has lead to some banks crafting loan products that offer lending rates with substantial discounts to the BLR.  

The BLR also lacks transparency, which makes it difficult for consumers to make an informed decision. Comparatively, the BR system forces banks to disclose their profits margin (spread rate) while encouraging healthy competition between the banks.

Ultimately, it benefits consumers as banks will have to set their BR based on their individual efficiencies. 

Why The Change From BR To SBR?

Under the previous framework – the Base Rate, lenders (banks) utilized various methods to set their respective base rates. Therefore, it became difficult for consumers to compare the different loan products and how much they would truly be paying.

SBR was introduced to eliminate that problem. All banks will use SBR as a common reference rate. It makes lending rates more transparent.

SBR is pegged solely to the Overnight Policy Rate (OPR), which is controlled by Bank Negara Malaysia (BNM).

Therefore, a loan’s interest rate will only change if there are changes made by the central bank towards the OPR. Consumers can now compare lending rates across banks without accounting for different BRs. 

NEW DEVELOPMENT: BNM announces a new Standardised Base Rate (SBR) beginning August 2022. 

What is Standardised Base Rate (SBR)?

standard base rate sbr bnm
Source: Bank Negara Malaysia (BNM)

In understanding SBR, we should first look at how banks quote a lending rate. Also known as the Effective Lending Rate (ELR), it is the all-in rate that consumers will expect to pay for the loan repayment.

The ELR is the total sum of the Reference Rate and the Spread that the bank uses. The Spread will include elements such as a borrower’s credit profile, liquidity risk premium, bank’s operating costs, profit margin and other costs.

This is an example of how banks in Malaysia quote lending rates:

Reference Rate (2.25%) + Spread (1.50%) = ELR (3.75%)

As we mentioned earlier, the SBR is pegged solely to the OPR. Therefore, with the SBR being used as the current Reference Rate, only a change of OPR can change the Reference Rate and consequentially, the ELR.

The SBR will be the same across all banks. This was not the case for the previous Reference Rate – the BR, which was set by the banks themselves and they could revise it at any time even if there were no changes to the OPR.

For the latest updated rates, get SBR, Base Rate, BLR & Effective Lending Rates for banks in Malaysia.

What do I need to know about Standardised Base Rate (SBR)?

Beginning 1 August 2022, Standardised Base Rate will apply to all new floating-rate loans and financing for individuals in Malaysia. These are loans where the interest rate can change throughout the loan’s tenure.

Standardised Base Rate applies to housing loans and personal loans but is generally not applicable to fixed-rate loans such as hire purchase loans (car loans) and SME or corporate loans.

Loans approved before 1 August 2022 will still be priced against the BR or BLR until the loan is fully repaid by the borrower.

From 1 August 2022, the reference rates (BR or BLR) move in tandem with the OPR. This means that if the OPR increases or decreases by 0.50%, the BR or BLR will increase or decrease by 0.50% too.

Standardised Base Rate SBR How Should You Compare Lending Rates Across Banks
Source: Bank Negara Malaysia (BNM)

What is Base Rate (BR)?

house-finance-rate-bank
© Getty Images

In January 2015, the Base Rate (BR) was introduced and the BLR abolished. Housing loans that were applied for under the BLR will still follow the BLR rates to the end of the loan tenure. The BR is only applicable to mortgage loans applied for from January 2015 onwards.

The BR is set by the banks themselves without any intervention from BNM and is dependent on the respective banks’ benchmark (internal) cost of funds and liquidity. Although the BR is highly dependent on the OPR where banks will benchmark their Base Rate against the Statutory Reserve Requirement (SRR)banks can revise the Base Rate anytime even if there are no changes to the OPR.

Under the BR system, banks will have to disclose their BR and their respective interest rate margins (loan spread), both of which makes up and determine the Effective Lending Rate (ELR) charged to the borrower. The loan spread rate or interest rate is affected by the following components:

  • Borrower credit risk
  • Liquidity risk premium
  • Bank’s operating costs and profit margin

Under this cost-plus structure, spreads will always be positive as it would not be possible for financial institutions to offer lending rates below the reference rate. For example, if a bank indicates that its BR is 3.30% and its interest rate margin is +1.35%, the ELR charged on the consumer is 4.65%.

Some banks opt to use the KLIBOR or the Kuala Lumpur Interbank Offered Rate as a reference rate for their financial products. KLIBOR is the average interest rate at which term deposits are offered between prime banks in the Malaysian wholesale money market or interbank market. 

What is Base Lending Rate (BLR)?

Base Lending Rate (BLR) is the rate that was used by Bank Negara Malaysia (BNM) prior to the year 2015. It was based on how much it cost to lend money to other financial institutions. The rate changed according to the Overnight Policy Rate (OPR), which is also known as the interest rate at which a bank borrows funds from another financial institution. The OPR was then set by BNM and is revised from time to time.

The Base Lending Rate (BLR) was designed to create a predictable interest rate across all the banks, which the calculation was transparent and could easily be found online. This resulted in similar mortgage rates across all the banks in Malaysia.

An example of how the BLR was calculated is as follows: a bank may indicate that its BLR is 6.80% and its lending rate is 2.45%. Thus the interest or Effective Lending Rate (ELR) charged to the customer is 4.35%.

On the other hand, there is also the Base Financing Rate (BFR). The BFR is the BLR equivalent for Islamic loan products.

What should borrowers do before selecting a housing loan?

1) With SBR, the Reference Rate is the same for all banks. Therefore, a consumer will only need to compare the ELRs or the spread above the SBR quoted by the banks before taking a new loan.

2) It’s important to take a look at a loan’s Product Disclosure Sheet (PDS). Key information is available here, including on the ELR and the total repayment amount for the loan you are considering.

sign-property-landlord
© kokouu | Getty Images

3) You will need to understand that every time there’s a change in OPR, your loan’s monthly repayment amount will also increase or decrease in tandem with the change in OPR.

4) Assess whether you can continue to afford the loan repayments if the effective lending rate increases in the future.

5) Should you wish to retain your old monthly instalment, you are allowed to do so upon submitting a request to your bank. However, you should be aware of the implications of maintaining the existing monthly instalment amount. These include any new terms and the additional cost of borrowing that will be incurred as a result of an extension of the tenure of the loan facility – all of which should be explained clearly by your bank beforehand. 

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