Homeowners have likely heard the initials ‘BLR’ while applying for a loan. However, the Base Rate (BR) system has since replaced the Base Lending Rate (BLR) structure.
BR serves as the primary reference rate for banks in Malaysia to determine interest rate before deciding the rate to apply to your home loan. If you’re confused, we’re here to break it down for you.
What is BLR?
Before 2015, the interest rate was referred to as BLR, set by Bank Negara Malaysia (BNM) based on our financial institutions’ overall financial health.
BNM also used the Overnight Policy Rate (OPR) to determine how much it cost lending money to other banks, a benchmark that is revised from time to time. When the OPR gets cut, Base Rates reduce, and so does the borrowing cost for consumers.
The purpose of BLR was to create a fixed and predictable interest rate across all banks in our country. How did people calculate BLR? Take the below example as a reference:
If a financial institution’s BLR is 6.80% with a lending rate of 2.45%, it charges an interest of 4.35% to the customer.
Contrarily, BLR is known as Base Financing Rate (BFR) for those using Islamic loans to purchase a property.
What is BR?
The new Base Rate system came into effect in January 2015, abolishing the BLR. Mortgage loan applications from this period onwards follow BR. So, how is it different?
Banks in Malaysia can now set their own BR without intervention from BNM, depending on their respective cost of funds and liquidity. It is also calculated against the Statutory Reserve Requirement (SRR) alongside the following components:
- Borrower’s credit risk
- Liquidity premium
- Operating cost and profit margin
Since financial institutions cannot offer lending rates below the reference rate, interest rate margins will always be ‘positive’ under the cost-plus structure. Take the below example:
If a bank’s BR is 3.30% with an interest rate margin of +1.35%, it charges an ELR of 4.65% on the consumer.
Why the change?
Rather than a fixed rate under BLR, the new system allows banks to differ in BR depending on their efficiencies in lending. Maybank and Public Bank, for instance, have a strong niche in consumer financing and are able to offer more attractive BR and ELR to customers.
Additionally, the new framework encourages greater transparency, something the BLR lacked. BR mandates banks to disclose their profits margin, allowing consumers to make better and informed decisions. Customers can no longer borrow below the base rate, unlike in the old days.
Those with a higher risk profile (i.e. lousy credit, low income, etc.) will enable their bank to arrange a higher ELR and make a more profitable net interest margin (NIM).
How does Base Rate affect financial institutions?
BR encourages healthy competition among banks to provide loan applicants with a broader range of options. The new reference rate helps reflect changes in cost from monetary policy and marketing funding conditions while inciting greater discipline and efficiency in banks in pricing retail financing products.
The downside of BR’s flexibility for respective benchmark rates is that smaller institutions might fall behind on getting more borrowers. Contrarily, bigger establishments have more wiggle room when setting reference rates. But at the end of the day, it all comes down to the management’s risk appetite.
How does Base Rate affect you?
Heightened transparency benefits both property owners and consumers. Although the BR varies according to banks, it often stays within a loose bracket.
During times when the Base Rates fluctuate, homebuyers can enjoy lower interest rates on their loans. Simultaneously, developers will also seek to devise various promotions and discounts to encourage prospective consumers. You may seize this opportunity to procure your dream house!
Potential homebuyers can stay ahead with the rates by comparing various banks’ home loan rates before deciding which is best. Doing extensive research will prepare you for the home-buying process and perhaps make it a bit less daunting.
What else to look for when buying a property?
Now that you know the basics of BR, there are several other key areas to note when shopping around:
- Maintaining your current BLR in Malaysia — If you signed your residential property loan before 2015, don’t worry. Your loan will continue under BLR until the end of the loan tenure.
- Your Debt Service Ratio (DSR)
- Mortgage Reducing Term Assurance (MRTA) — MRTA is insurance for your home loan, reducing or paying it off in the event that of death or permanent disability.
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