Why Base Rate (BR) instead of Base Lending Rate (BLR)? – New Loan Interest Reference Rate Framework in Malaysia (2015)
With year 2015 approaching, many were concerned about the implementation of new interest reference rate for mortgage loan; Base Rate (BR) which is replacing Base Lending Rate (BLR). Many started to worry about their existing mortgage loan and more were advised to expedite their application of mortgage loan in order to secure a “BLR Minus” package as the new package after the introduction of BR will be “BR Plus”.
While this is true, there’s no need for panic and we believe many were actually confused and misled by many in the industry including bank’s salesperson. BR was meant to be more transparent and let borrowers know the actual profit banks are making and more reflective of market condition from time to time.
One of the question that I loved to ask most : “Who/Which institution set the BLR?”. The most common answer that you will get is? – “Bank Negara Malaysia (BNM)”. And this is one of the most common misunderstood fact even among mortgage salespersons. In reality, since 2004, BNM removed the control of ceiling rate for BLR set by bank and also the ceiling for interest spread. This enabled bank to determine the BLR and their offered package to their client based on their finance and operating cost. (refer to: http://www.bnm.gov.my/files/publication/ar/en/2004/cp05_002_whitebox.pdf)
This led to a situation that most if not all major banks set the same BLR which doesn’t really reflect their finance cost and then compete among each other by giving “BLR Minus” package. Next question –
If Base Lending Rate (BLR) is the base, how can bank offer a “BLR Minus” package which is below their base lending rate?
The answer to this question will be the BLR isn’t really their base rate.
Eventually, this provided a perception to the public that they are getting a loan at a discounted rate. Imagine this, there are housing loans out there offered with BLR -1.7 package which brought the effective rate to 5.15% (Current BLR: 6.85%). Client would generally perceives that they are still getting discounted rate but only the discount is not as great as those getting larger loan who are offered with BLR – 2.45 (effective 4.4%). But with the introduction of BR which, let us assumed at 4%, about 0.75% above Overnight Policy Rate (OPR) and is now offered with a package of BR + 1.15 (effective 5.15%) compared to a client offered with BR + 0.4 (effective 4.4%), client will definitely started to question why his/her loan was loaded with 0.7% higher than another client.
We believe that the purpose of BNM to restructure the Lending Interest Rate system is to rectify this situation and require banks to set a BR which reflect their fund cost and operation cost. Therefore, introduction of BR should be very much welcomed and there’s no need for worries.
While with BR, the package will be “BR Plus”, the BR will not be equivalent to BLR which is 6.85% at this moment (Dec 2014). We strongly believe that the after the introduction of BR, the effective rate will still be almost the same as current BLR system.
*This article is solely based on our own opinion and for general reading purpose only.
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