Home Loan News
Bank Negara Malaysia (BNM) has recently announced that the Base Lending Rate (BLR), which is the primary reference point rate for new retail floating rate loans such as home loans, will likely be replaced by a new Base Rate effective 2 January 2015.
The nation are going to have its new reference rate framework for pricing loans – “base rate” – from Jan 2 next year, a move to make the bank lending more transparent for customers.
BLR was initially introduced to function as the main reference rate on retail floating rate loans in Malaysia, but BNM says that it has become less relevant as a reference rate for loan pricing, as lending rates on new retail loans are now being provided by substantial discounts towards the BLR. BNM also states that the BLR lacks transparency, which makes it difficult for consumers to make an informed conclusion.
“The new reference rate will certainly better reflect the modifications in cost due to the monetary policy and market funding conditions while stimulating greater discipline and efficiency between financial institutions within the pricing of retail loans,” said Bank Negara Malaysia (BNM) governor Dr Zeti Akhtar Aziz while introducing the latest reference rate.
She said, however, the latest base rate shouldn’t have any impact on the effective lending rates to retail consumers. “It is neutral on interest rates and does not represent a change in the monetary policy stance,” she said.As a result, the objective of the Base Rate is to offer the financial institutions figure out the benchmark cost of funds and the Statutory Reserve Requirement (SSP), which in other words implies that financial institutions along with other relevant finance companies shall now determine the interest rates which are best suited for their loans based on these factors. Other aspects including borrower credit risk, liquidity risk premium, operating costs and profit margin will be reflected above the Base Rate, which will then increase exposure and create better openness for consumers to be more well informed into their decision making.
“The greater transparency in-turn will enable more informed decision making by consumers,” Zeti said.The brand new Reference Rate will even better reflect alterations in cost arising from what’s going on in the present monetary policy and market funding conditions, while encouraging banking institutions to practice greater discipline and efficacy in the pricing of retail financing products.
For loans prior to 2015, the BLR will still be the reference point but should financial institutions make any alteration to the Base Rate; the same will be made to the BLR to reflect this.
Currently, the BLR is 6.6% while
The prevailing mortgage rates hover between 4.2% and 4.9%.
At a 4.2% lending rate which is BLR-2.4%, the bank is estimated to generate a profit margin spread of about 0.6% after accounting for the cost of raising term funds (3.2%) and the liquidity premium. The net profit margin then accounts for costs like potential provisioning, cost to acquire and maintain. Whatever is left after that is the bank’s earnings.
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