Association of Islamic Banking Institutions Malaysia

Home loans more affordable Print E-mail
Sunday, 01 March 2009
The reduction in Base Lending Rates means that homeowners with outstanding loans can pay less every month or have their loan tenure shortened, both of which will save them money.

AMIDST the gloom of an economic downturn, there is some good news for Malaysians. Homeowners with outstanding loans will now save money as well as shorten the tenure of the loan due to a reduction in Base Lending Rates (BLR).
In a scenario of a RM200,000 home loan over a tenure of 20 years, borrowers stand to save RM19,575 and shave one year and one month of the loan tenure – provided they pay the same monthly instalment before the reduction.

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Alternatively, they can maintain the loan repayment period of 20 years, and pay less every month, but still stand to save RM10,954. (See chart)

Bank Negara Malaysia (BNM) brought down the Overnight Policy Rate (OPR) from 2.5% to 2.0% on Feb 24 to allow for more disposable income in the hands of the public. This reduction will be reflected in a lower BLR.

BNM slashed its OPR by 75 basis points to 2.5% last month, its single largest cut since the OPR was introduced in April 2004, outlining its growing concern on economic growth.

Several local banks have followed suit and lowered their BLR from 5.95% to 5.55% (a reduction of 0.4%) per annum, with most taking effect next week.

The Association of Banks in Malaysia (ABM) executive director Chuah Mei Ling says, “As and when the OPR is revised, banks will announce their own BLR based on their respective cost structure and business strategies.”

Rajen Devadason, CFP, a Securities Commission-licensed financial planner with MAAKL Mutual Bhd, predicts that the revised BLR would be around 5.55% to 5.6%.

He says that banks are not obligated to ensure that the reduction in OPR is reflected in respective BLRs.

“BNM operates on a moral suasion basis that makes it very clear what is expected of banks. Banks do drop their BLR when the OPR is lowered, though it is clear that some choose to drag their feet in this regard,” says Devadason, who is also CEO of corporate mentoring consultancy RD WealthCreation Sdn Bhd.

“It has always struck me as morally suspect that banks tend to lower the interest rate paid to savers, say on FD accounts, almost immediately upon an OPR cut. This means they act quickly to ensure they pay out less money for the use of their depositors’ funds.

“However, have you noticed how they take their time lowering their BLR, which is linked to the amount they receive from borrowers? The net effect of doing so is to allow the banks to fatten their margins a little through the time delay between the two acts,” says Devadason.

He adds that with an OPR cut of 50 basis points, banks similarly cut its fixed deposit rates, for instance, by that same amount

“From what I’ve gathered, they have only chosen to cut their BLRs by about 40 basis points. This permits a 10 basis point fattening of their margins,” he says.

Banks are left to their own devices when it comes to implementing a lower BLR.

Explains Chuah, “Banks have the option of either retaining the tenure of the loan and reducing the monthly loan repayment instalments, or shortening the tenure of the loan whilst maintaining the amount of their customers’ monthly loan repayment instalments.”

However, she says that banks have proceeded with the former, and will officially notify their customers on the quantum of reduction of the monthly instalments and the effective date.

“Customers have until then to decide. In addition, bank customers who have made up their minds already at this juncture that they would prefer to retain the amount of their monthly loan repayment instalments may contact their banks immediately,” adds Chuah.

This means that the onus is placed on the borrowers to notify their respective banks if they do not wish to reduce their monthly instalments.

Accountant Ho Hock Doong, 36, who prefers to maintain his monthly instalment amount, says, “I have already budgeted for it and will maintain it – unless I get a pay cut or lose my job.”

Ho does not believe he will benefit from reducing his monthly instalments. “If I reduce repayments and put it in my bank account, what is the point? Interest rates for savings are lower than that for loans. I will lose money!”

Opines Devadason, “Individuals who are wise should always think about saving and investing. Saving should be done first, particularly in this crisis environment, where cash is king.”

He says that the borrower has a choice. “For individuals who still have their jobs and normal income levels, it would be wise to maintain their monthly repayment sum so that they finish paying off their loans as fast as possible. With lower interest rates, each Ringgit channelled toward paying down a home mortgage will pay down more principal simply because the interest component will be lower.

“However, for those in dire straits, maintaining the loan tenure while reducing the monthly payments will help them reduce their monthly outflow of cash. So, what to do depends upon the current circumstances of the individual,” he adds.

However, those with Islamic loan facilities may have obtained it at a higher profit rate than it is currently. Devadason believes that there will be reductions in the rate, but reductions tend to be smaller than the BLR cut.

According to Association of Islamic Banking Institutions Malaysia executive director Mohamed Rithuan Datuk Mohd Shamsudin, Islamic loans are fixed rate loans, and rates are locked in up front, and remain the same for the duration.

He clarifies, “We do not lend money, rather we trade with rates fixed to a selling price. We have a calculation to do this and the BLR is used as a basis.”

In the light of the lowering of the OPR, Mohamed Rithuan explains that, “The industry is recalculating their selling prices to accommodate the reduction. It will be adjusted by the end of this quarter, but by what quantum we are not sure.”

But it is possible for customers to benefit from the reduced OPR. Says Mohamed Rithuan, “They have to talk to their bankers or approach the branch they obtained the facility from and discuss it with them. It is not a difficult procedure.

“Alternatively, they have the option of switching to another facility with floating rate elements, but there might be additional costs involved. It is up to the individual if they want to seek a lower price.”

Ryan Ong, 35, who has switched from the Islamic facility to a conventional floating-rate loan, says: “There are many banks that will charge no moving cost when you switch facilities, so you pay almost close to nothing and get to enjoy better rates.

“If you took a loan 10 years ago, the rate would have been BLR plus (one or two percent), now it is BLR minus one or two percent.”

Consumers generally welcome the lower OPR as they would be able to pay for cheaper loans and have more cash in their pockets.

National House Buyers Association (HBA) volunteer Derek Law says he was happy with the move as it would lead to lower financing costs for Malaysians servicing house loans.

“This is especially useful during the current economic crisis as we will not only be able to pay less but also pay off our loans faster,” he says.

Law is advising house buyers who wish to change their loan schemes to do some “shopping” and research on which financial institution offered the lowest BLR.

He is also urging banks to stop charging interest for housing loans on projects which have been already been abandoned.

“It is only right for consumers to pay the principal amount for houses they bought. But it is burdensome for them to pay interest for houses which will not be used, especially during these challenging times,” he says, adding that house buyers would also still have to pay rental for the roof above their heads.

As of 2005, there were 58,685 house buyers affected by projects with a total value of RM8.04bil.

Consumer Research and Resource Centre CEO Paul Selva Raj says that while he supported the OPR cut, he hopes banks would show goodwill by reducing the interest for consumers servicing fixed rate loans.

“Consumers on dynamic loans will be able to benefit from the lower rates as the interest is adjusted according to the market. But this is not the case for borrowers of the fixed rate loans who are bound by contract,” he says.

Asked to comment on fixed deposit interest rates being reduced in tandem with the cut in OPR, Selva Raj says this was not too significant especially for those who have long-term investments.

“However, prudent spending is necessary because the lower BLR will enable consumers to have increased disposable income,” he says.

He adds that the Government should boost consumer confidence to spend as the current general sentiment was to exercise more caution.

“The Government should give the people confidence that they are in control of the economy and are focused on making it stronger,” Selva Raj says.

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