From my experience the banks would likely increase the [spread] of their variable-interest loans/financing for new applicants.

For example, RHB is now offering their ASBF at BR + 1.15% (without insurance) as their best rate today; however, just a few months ago, they were offering BR + 1.10%, and a few months before that BR + 1.00%. The banks do this to protect their margins (by increasing the spread for new applicants, as the OPR and BR are reduced)

You see, the effective interest rate for most banking products are lower now for everyone, but term loans stretch for up to 40 years (ASBF) and 35 years (mortgages); as the economy picks up the OPR would likely bounce and borrowers who apply for the financing when the OPR/BR are low will end up with higher [spread], long-term financing/loans; at least when compared to those who had their financing/loans a few months ago when the OPR was higher

Yes as posted in this thread here: https://forum.lowyat.net/topic/4916796

Copy paste from the above thread:


A lot of borrowers not really understand the interest mechanism how to impact lending policy

A lot of borrowers misleading & miscalculating the lending cost

I will give you direct example :-

Scenario 1 :-
Mr.A has borrowed the loan from Bank during Dec'19, the bank offering him by BR + 0.50% = 4.25% (during Dec'19 period, BR only 3.75%)

So now Bank Negara Malaysia (BNM) suddenly had announced 2 time interest rate cut (OPR cut), 1st cut at 23/01/20 by 0.25% and 2nd cut at 03/02/20 by 0.25%

Simultaneously Mr.A will enjoy lower interest rate charged by 0.50%, which mean now Mr.A can enjoy 3.75% home loan interest rate

Scenario 2 :-
Mr.Y now intend to apply home loan but unfortunately bank can offer BR + 1.00% = 4.25% (new BR is 3.25% after OPR cut 2 times)

So Mr.Y has asked the bank, why your bank still maintain offering 4.25% since BNM had already announced 2 times OPR cut??

The Bank officer told Mr.Y that, despite BNM had already cut 2 time OPR, it does not mean new home loan application can lower down the interest rate because now bank profit margin getting lower & lower

If, the Mr.Y taking the home loan right now, ie BR + 1.00% = 4.25%, in future Mr.Y need to absorb higher interest cost

The reason behind is because BR can adjust anytime but spread rate (ie +1.00%) is fixed for entire home loan, in other word, if next few years later BNM gradually increase back OPR at the same time BR also adjust back, let say gradually increase by 0.75%, so Mr.Y home loan interest rate cost become 5.00%

Now you know why NOT BENEFIT for those new home loan application

This post has been edited by AskarPerang: May 6 2020, 04:03 PM

Correct. The banks will always protect their margins. Everyone need to be smarter about this, but the bankers will never share this. During good times and bad times, they will talk about refinancing and applying for new financing.

How was spread rate determined ?

Competition. If the spread is too large, you product would not be competitive to other banks offering the same products

that means bank are not offering lower interest rate % for new home buyers?



This post has been edited by daimon: May 24 2020, 06:59 PM

Previously u get BLR + 1%

Due to current bad times, bank offer BLR + 1.15% to cover profit

So when economy recover, and OPR get back to pre-covid level you will paying a rate 0.15% more than old times

Of course for now, you will enjoy the low rates

This means that the property overhang may be here a while longer. My guess is at least 4-5 years.

Betul. +1 for great explanation

hello, thanks for the info, but i got some questions, totally a newbie on this

i dont really understand the whole BLR thingy, i know BR is the % rate set by Bank Negara, but all the banks can have their own rate on top of the base rate, that is BLR?

and may i know what is + 1% , +1.15% ?

so in this case, if i want to buy a property in current situation, how should I calculate which bank is offering a good interest rate, despite of it will back to normal OPR next time, which won't burden me.

thank youu

as per this....

Property overhang unlikely to be resolved in the next five years
By Kathy B. - January 20, 2020
https://www.nst.com.my/property/2020/01/558...next-five-years

Factors that led to the overhang
https://www.edgeprop.my/content/1638530/wha...operty-overhang

Both BR abd BLR are set by the banks themselves, not BNM. BNM only sets the OPR.

If you want to buy properties in the current climate, you can calculate them based on the effective interest rate of today, and expect the banks will increase their BR in the future once economy picks up

Whatever you do, you currently wont be able to beat the effective rate that your friends/peers got that signed up (for the same loan amount) a few years ago

ahhh, if i know the current interest rate, how much of the % increment I can estimate in future?

that also mean now is not really a good time to buy property right?

Depends on bank and profile geh... PBB spread still the same as before.

means logically need to check the spread before taking the loan now.
If still can get 1% or lower then it is good deal

Correct! Now is not exactly the best time to buy properties just because the rate is now low. The best time would be about 2 years ago, but we should not deal with hindsights

I am just highlighting that even though right now the effective rates for ALL THE BANKS are lower than it was before the reduction in OPR (and subsequently BR), once the OPR recoveres to pre recession levels of now, you are looking at an increased OPR thus increased BR thus increased effective rate

Perhaps, but this is the general trend that I am seeing as a broker for both mortgages and ASBF

hmm can i know how to check the spread?

and may i know what is the 1% or lower thingy?

Wow...that's before Covid, MCO, CMCO, EMCO,...

Looking at it now, EKO (Economy KO) means it could be the better part of a decade before we see any real recovery.

Doom and gloom eh

In a super simplified way in a restaurant setting

OPR (not always exactly take the value, some banks may differ like xx bps lower etc..) = Basic food ingredient cost
BLR = Utilities cost, labour cost, etc (OPR (from above) + whatever cost incurred extra to process the loan)

+ xx% = markup for the food (this will be vary based on your financial & Credit situation, are you a risky loan etc wadnot)

thats my understanding, at least

----

On your next point, because monthly installment is calculated based on current BLR + %% rate
so if OPR increase next time (means BLR Increase), meaning that whatever you pay now (supposedly unchanged) is paying more to interest portion and less to principal

meaning that in future your installment amount may get adjusted (but i think nor for much, not sure the calculation, maybe will be extra 50-100 depending on loan amount?)

good analogy, but the point is that I want to highlight is to be aware of the calculation for the effective rate, and the mechanism in which banks operate (to protect their interests by maximizing profits)

hmm seems this is a tough one...

so there is no formula or something we can refer to predict how much the interest will increase once OPR back to normal?

can i say current time being is not a good time to buy property at all since the interest is unpredictable

You can use the PMT formula in excel to get a rough estimate, can google for how to fill in values, play around with the int rate after bank offer u a loan (plz take note always use outstanding amt)

Depends on what u have actually.

Can u afford one now? Is your income stream and savings strong enough to support it? If you buy it now, does it achieve towards your goals?

Now is buyers market that maybe able to get some good offers. But we are not you, we can't decide for you it is a good time, decision or not. Take your time to consider if needed.

Cheers!

This post has been edited by viktorherald: May 26 2020, 09:26 AM

Well this doesn’t apply for Hire Purchase - auto loan though

So it’s always better to get car during lower interest period than higher times

may i suggest - the highest we had was 3.25% (which is +1.25% from current)... so whatever approved you had now + 1.25% will be (maybe) the highest you might be paying. if BNM + more %, then the higher you pay lo.

Loan Amount: 500k
Tenure: 35y

If bank offer 3.2% now ≈ RM1981 per month
If BNM increase back to the historically highest 4.45% (3.2%+1.25%) ≈ RM2350 per month
So when the bank increase +1.25% that time, you need to pay RM369

On interest calculation is abit difficult to determine because if based on your outstanding amount unless you lay down the excel sheet for the above scenarios.

The mortgage rate that you get for a new mortgage is a function of demand and supply, just like any typical goods and services. Should there be more demand for mortgages than the banks are willing to offer, then the banks can raise prices (in this case, interest rate is the price of the loan). On the other hand, if there are banks who are desperate to grow and competition is stiff, they may undercut their peers by lowering the mortgage rate charged. The OPR is simply the cost for the bank, which sets a baseline for the interest rate. It is up to market forces to determine how much markup that banks charge. Complaining to a bank that your friend got a better rate last year is no different from complaining to a petrol station that your neighbour got to pump petrol for 10 cents cheaper two week ago.

thanks alot!

this is more easier to understand for me, hahaha...thats alot

why la bank earn so muchhhh

Its a profit making entity after all

How to nego for a good rate now if refinance?

You cant

You can only apply, get offered a rate, appeal for better rates. I would do it for my clients but the banks still hold power over you

Dont like the offered rate? Take a hike

OPR reduction is meant to encourage cash relocation/movement to investment assets; helping existing borrowers is secondary.

no country could afford bank to fail and borrower's bankruptcy is collateral damage; hence, bank's interest is always a priority not borrowers.

Hmmm, can i say if i want to apply bank loan for now, it is better to choose a bank that offer lowest interest? So in future, if adding 1.25% wont be so much?

But I think there is not certainty right? hmmm

Of course, that goes without saying. Although there are no guarantees that the bank that you would be signing up with would change their rate according to the OPR. As you should know by now, the banks do not have to exactly follow changes to the OPR

Yes of course the lower the better but so far I’ve seen lowest is 3.2% now.

Last time when I sign, so happened OPR -0.25%. So the rate they offer was from 4.40% to 4.15%. They say la, they say ah, don’t quote me, although the BR drop they will increase the spread rate to maintain around 4.30%~4.40%, just to jaga the bank’s profit.

Example,
Before -0.25%, bank offer = 3.77% BR + 0.63% SR = 4.40%
After -0.25%, bank offer = 3.52% BR + 0.63% SR = 4.15%
The following week, bank maintain back = 3.52% + 0.88% SR = 4.40%

Something like that (that’s what the banker tell me lahh)

so that mean no matter how the bank will increase back to their normal interest rate but capped right?

To understand simpler, bank will anyhow adjust the rates to take care of their profits.