BLR / BR

From Year 1983 till Year 2015 1th January, We have been flirting with Base lending rate (BLR) on all our mortgage loan applications. Base lending rate is the minimum interest rate benchmark for every floating loan interest rate to charge the ‘’borrower. Last adjusted BLR rate was 6.85% and what does it mean?

Example:
a)Maybank mortgage loan

Rm500, 000 Property price,
35 years,
2.5% (This is the rate offer by individual bank itself),
100% Margin of finance by bank.

How is the installment calculated?

BLR 6.85 – 2.5%= 4.35% Effective lending rate

The interest rate charged on the loan will use ELR (Effective lending rate) 4.35%, hence the monthly installment:

Rm500, 000 Property price,
35 years,
2.5% (This is the rate offer by individual bank itself),
4.35% Effective lending rate
100% Margin of finance by bank.

would be:
Monthly installment :Rm2320
Total interest Rm474, 421

b) If Public bank offer

 Rm500,000 property price
35 years,
2.5% (This is the rate offer by individual bank itself),
100% margin of finance.
But with BLR change from 6.85% – 6.95%

BLR 6.95 – 2.5%= 4.45% Effective lending rate

The interest rate charged on the loan will use ELR (Effective lending rate) 4.35%, hence the monthly installment

 Rm500,000 property price
35 years,
2.5% (This is the rate offer by individual bank itself),
ELR (Effective lending rate) 4.45%,
100% margin of finance.
But with BLR change from 6.85% – 6.95%

Would be:

Monthly installment :Rm2350,
Total interest : Rm487, 345

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A 0.1% different will cost you Rm12, 925 of interest being paid.

Above example illustrates how BLR affects the total interest being paid after changes made by BNM. Don’t ask me for the formulae, just download a friendly installment calculator apps.
What affects the changes of BLR?

It would be the OPR (overnight policy rate) is the so called Malaysia Interest rate and control by Bank Negara Malaysia (BNM).

It affects the interest rate charged between borrowings of banks with central bank. When our economy are under high surge inflation, Property bubbles are growing larger with property price surging 200% mark, too much of easy funky money around.

Too much of inflation is bad for the economy, hence ZETI tightened up the money, slowing down the economy by increasing the cost of borrowing on banks from central bank; this reduces funds available in the market by a slight increasing on interest rate (OPR).

When existing BLR is 6.85, Zeti increases the OPR by 0.1%, hence 6.85%+0.1%=6.95% BLR.
BLR is influence by changes of OPR.

Year BLR%

YEAR IR
2014 6.85
2011 6.60
2010 6.30
2010 6.05
2010 5.80
2009 5.55
2008  6.75
2007 6.75
2006 6.00
2005  6.00
2004 6.00
2003  6.50
2002  6.50
2001 6.75

BLR 6.85% as a number doesn’t present much notion to borrower, as 6.85% is not transparent of how the figure is structured and how much profit does the bank collect. Therefore, Base rate are introduced.

banks-saving

2nd January 2015, Base rate is executed in Malaysia! Yay… nah…
Base rates are rate set within individual bank itself and changes to the rate aren’t directly intervened by the central bank alike BLR. Base rate differed across different banks and the rates are set depending on bank own efficiencies in lending; means to the bank liking itself.

Base rate comprising of:
Base rate(Benchmark cost of Funds + SRR) + Spread (profit margin, operating cost, liquidity risk, credit risk)= Effective lending rate
Base rate + Spread = Effective Lending rate
*We always look at the effective lending rate for our final loan interest charge*Base rate:

a) Benchmark cost of funds are adjusted by banks itself depends on its own valuation of its lending ability.

b) Statutory Reserve Requirement (SRR) are the minimum bank reserve quota set by BNM.

Spread

a) Spread is the margin of profit that banks set according to the borrower risk value.
Fun facts:

  1. Base rate is different across different banks.
  2. When OPR adjusted by BNM, Base rate wouldn’t bulge.
    Base rate would either stay neutral or increase, depends on bank owns decision. Base rate could even change without OPR altered.
  3. SRR is the reserve requirement that bank needs to uphold, set by BNM. It’s a liquidity management. When BNM believes economy is prospering and lack of funds, it may reduce SRR requirement to keep less money as reserves in bank and have bank lend more fund out for economic activities. This lead to higher loan growth. The changes of Base rate can reflect the effectiveness of Government Monetary Policy.
  4. Spread are defined according to the borrower risk profile, but spread rate are mainly fixed when display to public, as most of the borrower holds almost identical risk
    .
  5. Base rate will can be adjusted every 3 months, it’s following KLIBOR. Every 3 months we will witness a changes in bank base rate
    Example:
    Jan OCBC rate 4.02
    April OCBC rate 3.92
  6. Spread rate will not change and is fixed till the end of the loan tenure
  7. Even when base rate is superbly low, the effective lending rate in the end could be higher.
    Example:
    Maybank: Base rate 3.2% + Spread 1.5% =4.7%
    OCBC: Base rate 4.02%+ Spread 0.5%=4.52%

It all boil’s down on the spread given, hence do look at the effective lending rate instead!!! Shop around and ask your mortgage agent.
Base rate
Pro

  1. a) Greater competition between banksb) Higher transparency, as bank will display their profit margin and bank lending efficiencyc) Bank loan rate changes will have a higher correlation with Malaysia market economy and OPR.d) Better indication in monetary policy changes.

Cons

  1. a) Uncertainty. Rate will change every 3 months’ time.b) There’s a bottom line for how low our loan rate can drop.
    Example:BLR 6.85
    85-2.5%=4.35%
    6.85-2.6%=4.25%
    And so on

Base rate
3.2%+ 1.35%= 4.55%
3.2%+2%= 5.2%

BLR is negative in nature, it can go as low as the bank allows it to be.
Base rate is positive in nature, it has a benchmark bottom line. 3.2% is the bottom line and won’t go any further down.

So, what do you think?

What is BFR? And How to choose the best rate for base rate? Should I take the lowest base rate or should I take the lowest spread rate?

*all the base rate quote* (http://www.bnm.gov.my/…/…/base_rates/20150102_base_rates.pdf)