This article is written by Miichael Yeoh and featured in iProperty
Property buyers and investors alike were in a joyous mode when Bank Negara announced that the Overnight Policy Rate was reduced by 25 basis points on 7th May 2019. Let’s take a look at how it will affect your home loan.
The Overnight Policy Rate (OPR) is set by Bank Negara Malaysia (BNM). It is a rate a borrower bank has to pay to a leading bank for the funds borrowed. If you were to recall, the OPR went down as low as 2.5% on 21st January 2009, and hovered around 3% to 3.25% since 5th May 2011.
“The cut in Malaysia’s benchmark interest rate was widely expected. It is the first rate cut since July 2016. Policymakers said that the decision is consistent with the monetary policy stance of supporting a steady growth path amid price stability and it is intended to preserve the degree of monetary accommodativeness.” -Trading Economics-
What are the new lending rates of Malaysian banks?
A lower OPR means a slightly lower monthly commitment for existing mortgages or any financing contracts for borrowers. This reduction in rate is not only to provide some relief for the economy but also to provide the stimulus for investment activities by encouraging borrowings. How would this affect bank rates?
Some banks have reduced their Base Lending Rate (BLR) and Base Rate (BR) in tandem with the reduction:
|Hong Leong Bank||6.89%||7.14%||3.88%||4.13%|
How does the OPR cut impact your home loan?
The good news for borrowers lies in cost savings where either:
1) The monthly installment will be reduced (if the existing loan tenure is maintained)
2) The loan tenure will be shorter (if the old monthly installment sum is maintained)
But what is equally important, aside from the interest rate, 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 rate 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 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
Special thanks to iProperty for publishing my article.
You can read at iProperty Miichael’s article