By Peter Loke I June 2, 2010
BLR and its impact on home loans
The last rate hike was done in March 2010 when the OPR (overnight policy rate) changed from 2.00% to 2.25% (an increase of 25 basis points). One may complain because the OPR increased again in May 2010. Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz has clearly explained that the "normalisation" of interest rates is in response to the strong economy growth in Malaysia. Even though the current OPR rate is at 2.50%, it is still quite low as compared to 3.50% in year 2008.
In my opinion, the increase in rates is justifiable as it must be in tandem with Malaysia’s economic growth. Some banks have already adjusted the BLR (Base Lending Rate) rate from 5.80% to 6.05%. Should the Greece debt crisis and Euro economy affect the Asian region drastically and cause a negative impact to our economic growth, then I foresee that Bank Negara will adjust the rates accordingly.
Some property prices have remained resilient in the Klang Valley during the recent US economic crisis and have increased further during these couple of months. If one were to hold back on their property purchase just because the rates increased in May 2010, then they might regret it when property prices appreciate to a higher value later. Higher property prices mean that property buyers will have to fork out more money for their down payments.
What about the impact of the interest rate hike to existing borrowers? An increase in interest rates means that most of your monthly installments will go into servicing the interest of the loan. In layman terms, this means that your loan will take a longer time to be settled.
If the rates increase further this year, then the banks may consider revising the monthly installments to a higher amount just to maintain your original loan tenure. I would strongly advise existing borrowers to refinance their existing loan(s) at a lower rate now if they haven't done so previously.
Last year, it was possible to get BLR -2.4%, depending on your loan’s amount. But this year, the rate has been standardised to BLR -1.8%. Assuming that your outstanding loan amount is RM500,000 and the remaining loan tenure is 20 years, a difference of 1% interest can cost you approximately RM273 monthly. Add that up for 20 years and the total is a whopping figure of RM65,520.
In my next mortgage-related article, I will talk about whether it is feasible to refinance even if you have to pay the bank penalty and legal fees.
This article is written by a professional mortgage consultant Peter Loke (www.klang-valley.com)
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