Market is slowing, no doubt. However, for those who needs a place and found a good place at the price that you can afford, it’s all about applying for the best mortgage package, right? It’s very important that we understand what’s really happening come 2015. As some of us might have read before, the Base Lending Rate (BLR) framework would be replace by the Base Rate framework come 2nd January 2015. What would be some of the important changes when this is implemented? Let’s read an article from the mortgage guru Miichael Yeoh to find out.
With a blink on an eye, we will reach the year 2015. I am sitting in front of my desk now and it’s already 11.30pm 15th December trying to figure out what will happen to the mortgage industry in the 2015. Well, I came to a conclusion that every year is different and as each year we mature so does the industry. You have also witnessed, how the mortgage industry evolve through time.
In 2003, you see the birth of Central Credit Information System (CCRIS) where banks can check the borrower’s credit history with a tap of a button. With that in place it changes the whole lending landscape. Getting a loan will not be easy as before as the banks can now view the borrower’s debt and payment record. Until today, this has hindered many loan borrowers in getting their loan approve by the banks. We, as human being will and have adapted to CCRIS overtime.
Now, coming to 2nd January 2015 a new interest rate framework called Base Rate (BR) will replace the old Base Lending Rate (BLR) since it was introduced way back in 1983. According to Bank Negara Malaysia (BNM), BLR is already obsolete and less relevance today. I have a lot of enquiries what will be the base rate like. The closest prediction I can give right now will be similar to Klibor rates in the region of 3% and it will fluctuates more often than BLR. Now, don’t expect to have a negative spread as low as – 2.4% below BLR. Well, it will be plus maybe 1% instead. I think both types of interest rate will have a similar average rate about 4.45% – 4.6%.
For those of you who have taken the loan before 2nd January 2015 you will still pay your loan instalment based on BLR. A word of caution and I think most of you are not aware that some banks have already incorporated a clause which states that the bank have the right to change the current interest rate which is BLR to the new interest framework which means BR in the loan letter of offer which you sign with the bank when your loan is approved. If you have taken a new loan from March or April 2014 onwards, go back and check your loan letter of offer. You might see the clause.
The next question on your mind will be how banks determine base rate. According to BNM, base rate would be determined by the financial institutions’ benchmark cost of funds and the Statutory Reserve Requirement (SRR). The interesting part is this, how low your interest rate actually depends on the spread which will be determine by the bank’s profit margin, liquidity risk, operational cost and ultimately the borrower’s credit risk.
It’s very normal that borrower’s worried about the hike in interest rate and sometimes it dampens the hope of new property owners. Well, part of how low your interest rate can go also depends on the borrower’s credit risk. If the bank categorised the loan borrower as high risk the interest spread will be higher. Be it BLR or BR, both interest rate have a spread at the end. Either it can be minus or plus all depends on the borrower’s credit rating.
This leads us to the next interesting topic. What determines or what is a good credit rating? Banks uses Debt Service Ratio (DSR) to determine whether you have a poor, good or excellence credit rating. In Singapore, if the borrower is rated AA by the Central Credit Bureau then the loan will easily be approved and the borrower will also get a very favourable interest rate. In Malaysia, DSR is calculated by taking the debt divided by the net income multiply by 100. If your DSR is high it means you are a high risk borrower and your interest spread will be higher. If your DSR is as high as 70% and above, you will have less bargaining power with the bank for a lower interest spread.
If you want a lower interest rate or even loan approval, you need to start your mortgage planning now. Plan at least 6 months ahead before you submit your loan to the bank. I will not go any further here as plaining involve learning and understanding the basic mortgage to looking into in depth individual analysis before charting a mortgage plan.I hope my article will shed some light into what’s coming up in the mortgage industry.
You can also visit his website for even more mortgage related articles too. Here: miichaelyeoh.com
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