Bank Negara Malaysia has increased the Overnight Policy Rate (OPR) by 25 basis points from 3.00% to 3.25% – here’s how it will affect Malaysian homeowners and investors.
OPR is the interest rate at which a bank lends to another bank.
Why the rate hike?
Bank Negara Malaysia (BNM) expects the Malaysian economy to further expand this year, thus rationalising the OPR hike. As mentioned in a statement following the Monetary Policy Council (MPC)’s meeting on 25 January 2018,” With the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation.”
BNM said it “recognizes the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time”.
This is the first OPR hike in three and a half years – the last OPR movement was recorded in July 2016, where rates were decreased from 3.25% to 3.00%.
Changes in the OPR trigger a chain of events which affects the base rate (BR), base lending rate (BLR), short-term interest rates, fixed deposit rate, foreign exchange rates, long-term interest rates and ultimately, a range of economic variables, including employment, prices of goods and services (inflation) and economic growth.
What happens next?
- Banks will see an increase in profits.
- Fixed deposit rates will increase (Good news for those who have substantial savings)
- BNM expects the inflation rate to lower in 2018, for which the government is targeting 2.5-3.5%. The 2017 inflation rate topped 3.7%.
- Base Lending Rate (BLR) and Base Rate (BR) will increase (Thumbs down for borrowers).
Whenever the OPR goes up, banks will pass on the cost in the form of a higher base lending rate (BLR) to consumers; this means it is now more expensive for purchasers to take on a home/property loan as either:
- Your monthly instalment is bigger;
- Same amount of monthly instalment as before, but loan tenure increases.
Let’s take a look at some of the major banks who have increased their BR and BLR rates in tandem to the OPR hike:
|Hong Leong Bank||6.79%||7.04%||3.78%||4.03%|
How much will your mortgage go up?
Let’s consider the following scenario as a case study:
- Loan amount: RM 630,000
- Current interest rate: 4.5 %
- Tenure: 30 years
- Current instalment: RM3,192.12
Thus, an increase of 25 basis point to 4.75% will see your monthly repayments increasing by RM94.26 to 3286.38. Some people will say this is not much some says otherwise.
Some words of advice
In reality, the OPR is pretty volatile; many are not aware that the interest rate 20 years back was more than 10%! Borrowers must know how to hedge against the interest rate as a property loan is a long-term commitment.
Proper planning is imperative and it is important to determine your maximum loan repayment ability.
Strive to choose the instrument which best achieves your own hedging objectives; for instance, you can sign up for a Flexi loan and place your excess funds in your Flexi account. Should there be a further increase in interest rates, you will not feel the burden as much as a Flexi home loan provides you with the option to make payments in advance. Additionally, with a shorter tenure, you save on paying a greater amount of interest to the bank and also have the option to withdraw any excess payments made.
Alternatively, seek advice from a mortgage expert who can help you achieve your homeownership dream the financial-friendly way.
*Article written by Miichael Yeoh.