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Worrying about the recent Overnight Policy Rate increase? (What’s that?)

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I think only one person sent to me the Bank Negara’s recent Overnight Policy Rate hike of 0.25 percent. Perhaps this is because it is not that significant? Depending on the loan amount, 0.25 percent may not be significant actually. Based on a RM400k loan with everything the same and an adjustment of 0.25 percent upwards, the difference in amount is RM55 per month. This is equivalent to about 4 cups of Asian Dolce Latte in Starbucks Malaysia. Or alternatively, curb spending by around RM2 per day every month. Of course, if one has around 5 properties of RM400k, then that RM55 becomes RM275. Still acceptable because a RM400k property’s appreciation per year, even at just 0.25 percent is worth RM1,000 per year or RM83 per month. Theoretically, still a gain as long as the property is for own-stay or rented out. To understand a bit more on the implications, we can also read what Miichael has to say in his recent article in miichaelyeoh.com Miichael is a mortgage expert with 20 years of experience and is also an author and co-author of 2 books. He shares a recent story as well as some of the recent BLR increases by the banks operating in Malaysia today. His advice in brief? “Proper Planning.” Nopoint in over-stretching and then sweating everytime our Bank Negara says that OPR is about to be increased another time. Article by Miichael Yeoh below.

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The recent announcement by Bank Negara Malaysia (BNM) sees the increase of Overnight Policy Rate (OPR) by 25 basis points from 3.00% to 3.25%.

“With the economy firmly on a steady growth path, BNM said the Monetary Policy Committee (MPC) decided to normalise the degree of monetary accommodation.” Reported by  NST

Thus BNM thinks it’s about time to increase the OPR based on the strengthening of Malaysia’s economy. OPR had been stagnant since July 2016

Some banks Base Lending Rate (BLR) and Base Rate (BR) that increases:

Public Bank (Effective 30th Jan 2018 onwards) BLR 6.72% to 6.97%, BR from 3.52% to 3.77%

CIMB (Effective 2nd Feb 2018 onwards) BLR 6.75% to 7%, BR 3.9% to 4.15%

Maybank (Effective 29th Jan 2018) BLR 6.65% to 6.95%, BR 3.00% to 3.25%

Affin (Effective from 30th Jan 2018) BLR 6.5% to 6.75%, BR 3.85% to 4.10%

Hong Leong Bank (Effective 30th Jan 2018) BLR 6.79% to 7.04%, BR 3.78% to 4.03%

What will happen to Malaysia with such an increase?

  1. Banks will increase their profits
  2. Fixed deposit rates will increase (Good news for those who likes savings)
  3. Base Lending Rate (BLR) and Base Rate (BR) will increase (Thumbs down for borrowers)
  4. Inflation will decrease. We are at 3.7% in 2017. How much you think will increase again?
  5. Personal inflation will increase again. How much do you think is our own inflation right now?

Let’s talk about BLR and BR. If OPR increases, they will go up also. What will happen to the borrower’s instalment?

  1. Monthly installment goes up
  2. Maintain monthly installment but your borrowing years will increase.

In summary, something got to increase.

For example:

Loan amount                    RM 500,000

Current interest rate:   4.5 %

Tenure:                              30 years

Current installment:     2553.43

An increase of 25 basis point equivalent to 0.25% to 4.75% will see an increase of instalment of 2,608.24. An increase of RM 54.81. Some people will say this is not much some says otherwise.

In reality OPR are volatile. In can either go up or go down. When you buy a house are you going to be worried for the next 30 years when you take up a loan with the bank?

In my seminars and I mentioned before, borrowers must know how to hedge against the interest rate as we will be taking the loan for long term. It will be too late if borrowers start to panic now. Do you know 20 years ago when I was working in the bank the interest rate is more than 10%.

What you should be doing is to start proper planning whether you are the first time property buyer or investor.

I have a good friend. He drove all the way from Kuala Lumpur to Penang to meet me. He was worried after he buys the house what will happen if interest rate were to increase. This is the first time he is buying a house and he does a very carefully planning as this will be his biggest borrowing going forward.

What I told him next he is still doing until today. Since he already do a proper planning, he will know how much excess fund he has after deducting his instalment. I encourage him to take up a flexi loan. Put the excess fund into your flexi account. What will happen is that it will help to reduce the interest payable. When the interest rate increase, he will not feel the extra burden as he has already paid more than his installment. This is called hedging against interest rate.

I always belief in doing proper planning. I hope my write up helps.

See you on my next article.

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Next suggested article:  Speculators, Interest Rates and Over-leveraging

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