New Interest Rate Framework Effective 2Jan 2015

According to Bank Negara, effective 2 Jan 2015, the base rate will replace the BLR (Base Lending Rate) framework as the main reference rate for new retail floating rate loans. The base rate will be determined by the financial institutions’ benchmark cost of funds and the statutory reserve requirement, which currently stands at 4%. Other components of loan pricing, such as credit risk, liquidity risk premium and operating costs, will be reflected in a spread above the Base Rate.  The reasons for the shift to the new framework are: i) to address the issue of negative spreads between retail lending rates on new loans and BLR; ii) improve the transmission mechanism of monetary policy; and iii) to promote a more transparent pricing of floating rate retail loans. 

Also noted with interest is that Malaysia household debt ratio to GDP had risen to 86.8% in 2013 (vs 2012’s 81.3% and 2011's 76.2%). However, growth had slowed from 13.5% in 2012 to 11.7% in 2013. BNM expects house prices to remain elevated and will continue to be largely driven by the structural mismatch between supply and demand.  

(Source: 2013 BNM Annual Report) 

Interest Rate Sets To Rise, and Is Not Just BLR

Barring any unforeseen circumstances, the good old days of low interest rates is over soon. Therefore, be prepared to tighten your seatbelt for your secured property loans.

As we all know, US QE tapering has already begun and is a matter of time the Federal Reserve will start raising their interest rates. We have already witnessed a number of Asian countries started to raise their interest rates too, in order to prevent significant capital outflows. Will Malaysia be any different?

The answer is quite a certainty, NO. Foreign liquidity is like a sum of all parts, someone will gain at the expense of others, and vice-versa.

At the banking side, we are already seeing banks gradually revising their interest rates upwards, by reducing the spreads. That means to say, loan packages such as BLR-2.4 or BLR-2.5% may just be a thing of the past. And we are not even talking about BLR yet (currently at 6.6%), which is directly influenced by Bank Negara's OPR (Overnight Policy Rate). Few months back, Bank Negara already presented a working paper on revamping the BLR framework, with the intention to protect the risks of Malaysia's lending financial system. Obviously, Bank Negara is concerned that with the potential real estate property cycle reaching its peak, our banks might have undertaken too much risk by undercutting their margins (vs the cost of funds).

Should say BLR increased by 50 basis point, and spread reduced to 2%, the effective interest rate will become 5.1%. That translates to about 11% increase in monthly installment for a loan size of RM500k with 30 years loan tenure!

For the more conservative, time to look at fixed rate loan perhaps?