EFFECTIVE January 2 2015, the Base Lending Rate (BLR) was replaced by Base Rate (BR) for residential property loans to create better transparency.
Previously, BLR changed according to the Overnight Policy Rate (OPR), which is determined by Bank Negara Malaysia from time to time.
The BR is dependent on banks’ benchmark cost of funds and liquidity. Banks can also review it anytime if there are no changes in the OPR.
Analysts have said the switch from BLR to BR is unlikely to have any impact on the demand for residential properties.
According to Bank Negara, BR was introduced to promote healthy competition among banks.
BR calculation is different than that of BLR, said GM Training Academy PLT chief executive officer and founder Miichael Yeoh.
BR is also only applicable to residential property loans, while loans for commercial properties are still based on BLR, he said.
With the BR, interest rates are determined by banks’ benchmark cost of funds and Statutory Reserve Requirement (SRR).
BR should differ from bank to bank depending on their own efficiencies in lending.
Some banks have a higher BR compared to others. For example, CIMB Bank’s BR as at April this year was 3.90 per cent compared with HSBC Bank’s 3.50 per cent and Maybank’s 3.00 per cent.
Yeoh said borrowers who have been servicing their loans before the date of BR implementation would continue with their BLR-based agreement, unless they refinance it.
According to a book published by Yeoh and his partners on BLT (Bank, Law and Tax), there are three determining factors on how BR is calculated:
1) BR will depend on the SRR determined by Bank Negara. It is the minimum level of reserves required for each bank to retain before lending out. If the central bank increases the SRR, the cost of lending will increase. You will notice that BR also increases.
2) The “Spread Rate” above the BR will be determined by the borrower’s credit risk, liquidity, operating cost and profit margin. If the bank’s profit were to increase, the BR would be reduced.
3) Correlation with the OPR. If Bank Negara increases the OPR, the BR will also increase.
How is effective lending rate calculated?
BR is a floating rate. That means it could go up or down due to the above reasons.
“The spread is fixed. If we add this two we will get the Effective Lending Rate (ELR). Every bank has a different BR. So, is the BR the determining factor when you choose which bank to take a loan facility from?
“The lowest BR does not necessarily mean the lowest interest rate. It also depends on the spread. BR can be low but the spread can be very high. We have to look at the ELR to determine which package to take,” said Yeoh.
He added that unlike BLR, BR is easier to determine.
“I would think that eventually every type of loan will be in BR. If you were to walk into a bank today, the employees will tell you that the interest rate is board rate and not negotiable.
“Yes, the BR is non-negotiable but the spread is. It depends a lot on what category of risk the borrower is in. If the risk is low, there is room to negotiate a lower interest rate. Make sure you have a good credit rating before negotiating.”
Potential house buyers should shop around and check all the best home loan rates from various banks to determine the most suitable deal to apply for.
Looking at the current market situation, it is best not to rush. However, do take note that some banks may offer better deals under the current circumstances.