What is Base Rate and How Does Base Rate Affect All Of Us?
On 19th March 2014, Bank Negara Malaysia ( BNM) announced that effective 2nd January 2015, Base Rate will be replaced the Base Lending Rate ( BLR) as the main reference rate for new retail floating rate loans, mainly affecting Home Loan interest rates.
As long as you have a home loan or might get one in the future, it is good to know the new Base Rate soon will replacing Base Lending Rate.
In the recent period, the BLR has become less relevant as a reference rate for loan pricing, as lending rates on new retail loans are being offered at substantial discounts to the BLR. The BLR also lacks transparency, which makes it difficult for consumers to make an informed decision.
According to BNM, the new Reference Rate Framework aims to provide a more transparent reference rate to enable better decision by consumers in making choices among the many loan products offered by financial institutions. The new reference rate will also better reflect changes in cost arising from monetary policy and market funding conditions, while encouraging greater discipline and efficiency among financial institutions in the pricing of retail financing products.
The Base Rate will be determined by the financial institutions’ benchmark cost of funds and the Statutory Reserve Requirement (SRR). Other components of loan pricing such as borrower credit risk, liquidity risk premium, operating costs and profit margin will be reflected in a spread above the Base Rate.
Hypothetically, the new Base Rate should differ from bank to bank depending on the performance of each bank. The better performing bank will be able to offer more attractive and competitive rates for their customers. So instead of the fixed BLR across all banks we see now, each bank will have a different rate forcing them to be more competitive to offer the lowest rates to the customer.
Those big banks will have a better pricing power compared to smaller banks, because their cost of funding is usually lower via current/saving account (CASA). That’s the cheapest cost of funding for any banks, other than Fixed Deposit.
BNM said the new Base Rate “should not” have an effective impact on existing loan borrowers. Of course, it was different story if the borrowers refinance their existing loan, either it’s personal loan or housing loan.
Hopefully, this BR rate will mean more competitive market with cheaper rates to consumer like us.
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