BNM reduces OPR again! to 2.50% = A shorter loan tenure & Lower monthly installment payments!

Today 02 March 2020, The Bank’s MPC decided to reduce the OPR by 25 basis points to 2.50%. The ceiling & floor rates of the corridor of the OPR are correspondingly reduced to 2.75% and 2.25%, respectively!

On 22 Jan 2020, The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 2.75 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 3.00 percent and 2.50 percent, respectively. When is comes to home loan products, the Overnight Policy Rate (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 installment payments. Banks are required to send out a notification letter on the revised installment amount when there is a BR/BLR revision – this must be done at least 7 calendar days prior to the date the revised monthly installment comes into effect.

2) A shorter loan tenure (if the old monthly installment sum is maintained). Even though by default, banks are required to lower the monthly installment 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 installment payments.

What are the new lending rates of Malaysian banks?

Previously when the OPR was cut to 3% in May 2019, the major banks in Malaysia reduced their BLR and Base Rate BR in tandem with the OPR reduction. Similarly, all the major banks have reduced their Base Lending Rate (BLR) and Base Rate (BR) in tandem with the latest OPR reduction including Maybank, Public Bank Bhd, RHB Bank Bhd, CIMB Bank Bhd and OCBC Bank:

But 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)

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.

*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.

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