This article was updated on 14 May 2020.
Bank Negara Malaysia has reduced the Overnight Policy Rate (OPR) for the third time in 2020 by another 50 basis points (bps) to 2.0% due to the COVID-19 outbreak. This is the lowest value in over a decade. Let’s take a look at how it will affect your home loan.
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.
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 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”. Just a month after that, BNM announced yet another OPR cut on 3 March 2020 – by another 25 basis points to 2.5% as the Covid-19 outbreak has taken a toll on the Malaysian economy. This time round, the OPR cut was slashed by 50 basis points which goes to show how real the impact of Covid-19 is on the economy.
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) & Base Lending Rate (BLR), where the BR & BLR usually reduces or increases in tandem to an OPR cut/hike.
With the OPR cut, it is now 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 (bps) to 3% in May 2019, it had an immediate effect – According to the Ministry of Finance, loan approvals in May 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 are the new lending rates of Malaysian banks?
Most of the major banks in Malaysia have reduced their Base Lending Rate (BLR) and Base Rate (BR) by 50 basis points in tandem with the recent OPR reduction. These include Maybank, Public Bank Bhd, RHB Bank Bhd, CIMB Bank Bhd and OCBC Bank, as shown below:
|New (May 2020)||Old||New (May 2020)||Old|
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. 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)
*As of 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.
Although the decrease in OPR would not see a sharp acceleration in the property sector, it may very well encourage spend, as interest rates have much influence on an individual’s ability to purchase residential properties, by increasing or decreasing the cost of a mortgage.
Although interest rate hikes will occur, in ways which we cannot determine the outcome, the best way to navigate towards a good deal is to negotiate for a better spread.
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