Base Rate Explained

Base Rate p

It has been months since January 2015 the new Base Rate (BR) came into effect taking over from Base Lending Rate (BLR). I have received many enquirers and interviews on this. I think it is time I update all of you on BR.

Why BR?

According to Bank Negara (BN), BLR is already been around since the year 1983. It lacks of transparency. The new BR is more relevant and promotes competition among banks.

How “BR” is determined?

Loan borrowers must be aware how BR is calculated. According to Bank Negara (BN) it is determine by the following factors
a) Benchmark cost of funds and Statutory Reserve Requirement (SRR).
SRR means that if Bank Negara (BN) increase the reserve by the banks, you will expect the cost of funds to increase and ultimately increase the BR.
b) There is a strong link between BR, market rates and overnight policy rates.

How the “Spread” is determined?

Interest Rate will not be completed if you don’t have the spread. Do not expect the spread to be negative but positive. According to BN , the spread will be determine by borrowers credit risk, liquidity risk, operating cost and profit margin.

In order to sum it up you take
Base Rate + Spread = Effective Lending Rate

How to choose the package then?

Unlike last time during the BLR where the interest rate is more stable, BR is more volatile. You can view the latest BR at http://www.bnm.gov.my/documents/2015/base_rates/20150102_base_rates.pdf

Different banks the BR is different and the difference can be a big gap. It can be as low as 2.96% to as high as above 4%. So How? Don’t just look at BR alone but the spread also. Look at the overall effective lending rate.

Is BR for all types of loans?

I did a loan on commercial property this year, guess what it is still on BLR. This prompted me to check with my banker friends, most of the packages for commercial properties are still on BLR. According to BN, BR is applicable for individuals only. You can read about it at http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/Consumer%20Guide%20on%20RRF_Eng.pdf

Please check before you submit for the loan.
How can I get the lowest rate?

I have been ask this question in almost all the seminars. My answer is always the same. Do you think the lowest interest rate will serve your purpose? It always comes with “Terms and Conditions”. If you are an investors looking to flip the property within 2 years do you look for the lowest interest rate or no lock in and penalty packages.

Remember this, all of us are different and we earned differently. Get your goals right before you borrow.
Now come the interesting part. In the banks a lot of the things can be negotiated. When you asked the banker they always say their interest spread is “board Rate”. Do you know that this can be negotiated lower if you got a low credit risk and the right loan amount? Since BR is in effect I know there are banks who determine your spread using your credit risk. The higher the chance of default in the loan your interest spread is higher.

Will interest rate increase in future?

Predictions, predictions and predictions. This is what I like about the work I do. I am allowed to make predictions. Looking at the current scenario the interest rate I expect will rise in the next quarter if we take inflation, the depreciating of our ringgit, goods services tax among others in consideration.

That is why I encourage all loan borrowers to plan first before borrowing. We got to hedge against the eventual rise in interest rate.

I hope that you get better insights on BR after reading my article.

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From the Desk of

Miichael Yeoh

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