*This article was updated on 11 May 2022.
Bank Negara Malaysia (BNM) has increased the Overnight Policy Rate (OPR) by 25 basis points from the historical low of 1.75% to 2% on 11 May 2022. Let’s take a look at how this will affect your home loan.
What is OPR Malaysia?
The Overnight Policy Rate (OPR) is set by our central bank, Bank Negara Malaysia (BNM). It is a rate a borrower bank has to pay to a lending bank for the funds borrowed.
A lower OPR creates the domino effect of lower interest rates – this is meant to encourage consumer spending and spur borrowing activities which in turn, will stimulate the domestic economy.
A higher OPR, on the other hand, will translate into a higher interest rate and make the borrowing cost expensive for borrowers such as home buyers and businesses.
Why did BNM reduce the OPR in 2020 and increase it in 2022?
Malaysia’s Overnight Policy Rate was maintained at a historical low of 1.75% since it was reduced from 3% in 2020 due to the Covid-19 outbreak, until BNM increase it to 2% on 11 May 2022.
The 1.75% was the lowest OPR on record, according to BNM data that dates back to 2004 on its website.
- On 22 January 2020, the Monetary Policy Committee of BNM in a surprise move announced that it is slashing the OPR by 25 basis points (bps) to 2.75%, quoting that “the adjustment to the OPR is a pre-emptive measure to secure the improving economic growth trajectory amid price stability”.
- BNM announced yet another OPR cut on 3 March 2020 – by another 25 basis points to 2.5%
- On 5 May 2020 – just two months after the second reduction – the OPR was further reduced to 2% to encourage borrowing amid the Covid-19 pandemic.
- On 7 July 2020, the OPR cut was slashed by 25 basis points to 1.75% which goes to show how real the impact of Covid-19 is on the Malaysian economy.
- On 11 May 2022, BNM decided to increase the OPR by 25 bps to 2%, citing “the sustained reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity”.
How does the OPR affect home loans?
When it comes to home loan products, the OPR has a direct influence on a bank’s Base Rate (BR) and Base Lending Rate (BLR) as well as the Standardised Base Rate (SBR), where the BR, BLR and SBR usually reduces or increases in tandem to an OPR cut/hike.
What happened if BNM reduces OPR?
With the OPR cut, it will be cheaper for new property purchasers to take up a home loan product as they could leverage on the lower initial interest rate.
When the OPR was reduced by 25 basis points to 3% in May 2019, it had an immediate effect – According to the Ministry of Finance, loan approvals in May 2019 soared by 13%.
This is because, with a lower OPR, there is a reduction in the effective lending rate (ELR) of existing home loans which are using a variable or floating rate.
In other words, existing borrowers will benefit from either:
1) Lower monthly instalment payments. Banks are required to send out a notification letter on the revised instalment amount when there is a BR/BLR revision – this must be done at least 7 calendar days prior to the date the revised monthly instalment comes into effect.
2) A shorter loan tenure (if the old monthly instalment sum is maintained). Even though by default, banks are required to lower the monthly instalment of variable home loans accordingly, they will still provide consumers with the option to shorten their loan tenure instead.
Do note that current borrowers who have taken up a fixed deposit rate home loan will not see any changes in their monthly instalment payments.
What happens when OPR increases?
When BNM raises OPR, however, banks’ interest rates will be revised upward accordingly and thus making it expensive for consumers to get a loan.
In a nutshell, a higher OPR will:
1) Increase monthly instalment payments. Whenever the OPR goes up, banks will pass on the higher borrowing cost in the form of a higher interest rate to consumers, which in turn increases the amount of your monthly instalment payments.
2) Loan tenure will increase if the monthly instalment amount is maintained. If the old monthly instalment sum is maintained, the repayment period will become longer due to the increase in interest rate.
What are the latest lending rates of Malaysian banks?
Most of the major banks in Malaysia have reduced their Base Lending Rate (BLR) and Base Rate (BR) in tandem with the OPR reduction to 1.75% in 2020. These include Maybank, Public Bank Bhd, RHB Bank Bhd, CIMB Bank Bhd and OCBC Bank, as shown below.
But in view of the recent OPR hike, it is anticipated that banks will be increasing their BLR and BR by 25 bps in the next few weeks.
*As of 6 August 2020
What is equally important, aside from the BR and BLR, is the spread that the bank charges. This spread here would be the bank’s profit margin. Spread as the banks call it, is always fixed.
Take BR as an example, by adding the BR with the individual bank’s spread (profit margin), you will get the effective lending rate (ELR).
For instance: 3.5% (BR) + 1.3% (Spread) = 4.8% (Effective Lending Rate)
*Effective 2 January 2015, the Base Rate (BR) replaced the Base Lending Rate (BLR). This change was made for several reasons – The BLR 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 now have to set their BR based on their individual efficiencies.
You cannot negotiate with the bank on the interest rates (BR or BLR) but you can negotiate on the spread. Getting the best possible rate depends on your negotiation power. However, your negotiation power depends on your risk level.
If the bank determines you as a high-risk individual (bad credit, low income or poor employment histories), it may be more difficult for you to negotiate. You will be considered lucky to even have the bank approve your loan.
A medium-risk individual may have a fighting chance, but the outcome is 50-50.
On the other hand, if you are a very low-risk individual (meaning you have a very good credit rating), you can appeal for a lower spread. Why? Because the bank would rather give you a lower interest rate than to lose you to other competitor banks.
Whether you are low, medium or high-risk individual, it really depends on whether you do any financial planning. Proper planning will be able to lower your risk level, thus giving you more negotiating power.
If you are thinking about buying a home, do ensure that you are ready for such a purchase. Use our home loan eligibility tool, LoanCare to find out if you will be able to secure a home loan for that property you have your eye on.
Edited by Reena Kaur Bhatt