Base Rate vs BLR in Malaysia: How Does BR Work? (Part 3)
How have BR affected banks so far?
So far, it has been business as usual for banks and mortgage providers because the change from BLR to BR has not altered the effective lending rates significantly. So when it comes to actual interest rates, consumers are still paying pretty much the same thing on the BR as they did with the BLR.
Some experts predicted that the switch from BLR to BR will create better transparency and consequently, greater competition among banks to provide a wider range of options for loan applicants.
According to BNM, the new reference rate will also better reflect changes in cost arising from monetary policy and market funding conditions, while encouraging greater discipline and efficiency among financial institutions in the pricing of retail financing products.
Also, because the base rates are managed by individual banks, this will compel banks to come up with more cost-efficient rates in order to compete with each other and create a much more competitive market.
However, given the flexibility to determine their respective benchmark rates, smaller institutions may risk losing out on the race of getting more borrowers for loans.
Bigger establishments will have more room to manoeuvre when determining the reference rates, whereas smaller institutions may not have as much leeway to offer competitive rates. However, loan rates will still depend on the management’s risk appetite at the end of the day.
However, just like BLR, the BR can fluctuate and that can make it difficult for consumers to set a budget in the long term.
The previous BLR changes according to the overnight policy rate (OPR), which is being determined by the central bank from time to time. The current BR, on the other hand, is dependent on the banks’ benchmark cost of funds and liquidity and can be reviewed by banks anytime even if there are no changes in OPR.
The borrower’s credit risk also determines the amount of interest he or she will have to pay. If the bank categorises the loan borrower as high risk (from having a bad credit rating), he or she will likely have to pay a higher interest rate, so it is important to plan ahead and set your finances straight before applying for a mortgage.
Has BR affected consumer demand for property?
The switch from BLR to BR is unlikely to have had any direct effect on property demand.
Demand for property has generally been sluggish in recent years due primarily to the cooling measures introduced in 2013. Anticipated higher mortgage rates due to the implementation of the 6% Goods and Services Tax (GST) in April has further contributed to the slowdown.
The BR system may actually benefit customers as a more transparent reference rate will enable them to make better money choices when it comes to navigating an array of loan products offered by various financial institutions.
Customers with a higher risk profile such as those with bad credit, low income or poor employment histories will enable the bank to set the ELR higher and make a more profitable net interest margin (NIM). However, this could result in potentially higher default rates in the future.
Homebuyers can keep ahead with the rates (new and old) by comparing all the best home loan rates from the banks before making a decision on which loan to apply for. By doing thorough and adequate research, you can remove some of the intimidation factors from the home-buying process.
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