06/02/2015
All the hype around the new base rate framework, in a nutshell:
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How Bank Negara Malaysia Affects Your Property Loan Pricing
Property owners and potential home buyers have been known to partake in coffee shop discussions about Base Lending Rate (BLR), and how the government should lower it to make property ownership more affordable. Before you start ranting about how the government is to blame, there are two essential things to understand – firstly, what is BLR and how it is determined, and secondly, that effective 2015, BLR will be replaced by a whole new reference rate framework for pricing loans. To gain a better understanding on the whole matter, we have to get a little technical. Let’s explore.
What is Base Lending Rate?
Most of you property owners out there should already have a pretty solid understanding of BLR and its inner workings, so this is just a nutshell explanation for those of you who aren’t in the know. BLR itself is not decided by out Bank Negara, but by the banks themselves. That’s the reason why this rate varies slightly from bank to bank. It is, however, very dependant on something called the Overnight Policy Rate (OPR), which BNM determines.
Here’s where you need to understand that setting this OPR isn’t arbitrary, but takes into account various economic indicating factors, such as inflation, economic growth, possible risks – basically, the overall economic outlook. BNM adjusts the rate according to how much money they want in circulation versus how much is tied up in savings.
One interesting thing to note is that OPR doesn’t just influence BLR, but a whole myriad of other variables such as fixed deposit rate, foreign exchange rate and short and long term interest rates, which, by extension, affect prices of goods and services, employment, output and other elements that play a part in our economy.
Changes in 2015
Just in March this year, BNM announced that a new interest rate framework known as Base Rate would replace the BLR come 2015. The major difference is that this new rate will be determined by different factors, which includes banks’ cost of funds, their Statutory Reserve Requirement (SRR) account balances (how much they have in their reserve accounts with BNM proportionate to their eligible liabilities), borrower credit risk, liquidity risk premium and operating costs and profit margin.
As such, this new framework would ideally bring about increased transparency for you consumers out there, which will manifest into greater efficiency, discipline and adherence to individual banks’ performance, compared to the BLR system. Ultimately, if all goes according to plan, the market will be thrown into a healthy competition environment, providing borrowers with more attractive and competitive rates – you would get to go shopping from bank to bank to find the best rate.
For 2015 updated Base Rate + Spread data for all banks, click here and here.
Already have a loan in place?
Don’t panic; after the new framework’s effective date of 2 January 2015, prior BLR-based loans will continue to be referenced against the BLR. Yes, even though it’s replaced in terms of loan pricing, it will still exist – it’s key influence, the OPR, is used for other economic variables, remember?
However, when a bank makes any adjustment to its Base Rate, a corresponding adjustment to its BLR will also be made. Because of this, BNM will require all banks to display both Base Rate and BLR at all branches and websites. Also, the new rate will be used for refinancing of existing loans after it takes effect.
Conclusion
Having said all that, this new move by BNM, which heavily affects loan pricing could still differ in reality from the ideal when it comes into play. As with any major economic initiative, it could bring about ripples in the financial market, implying unpredictability of interest rates in the future.
As a consumer, what you can do, that is if you’re planning to buy property, is to make your move before the year ends. That way, when the new Base Rate comes into play and somehow raises interest rates, you would still enjoy yours as it was. Conversely, if it turns out to be lower, you can look at refinancing options, which then would use the new Base Rate.
Source: LoanStreet
