Property Investment 101: Every 1% increase in interest rate means how much extra repayment per month?
Rising interest rates are quite common in recent years
Whether it’s the U.S, or Australia or even the UK, the central banks of these countries have been increasing their rates. Generally, they say it’s to fight the rising inflation. Briefly, when too many people are spending too much of their money and the prices moved up too fast because too much money chasing too few goods, the central banks will increase the rates. People may prefer to keep their money versus spending it since they will get higher returns. Theoretically, that’s what they say.
Well, Malaysia has not much choice but to follow suit. Just look at the US$ versus RM and you get some idea why we cannot let the difference between rates be too big. By the way, exchange rates SHOULD be determined by trade and NOT speculative purpose. Period. Today, let’s just look at numbers which will affect homeowners who are still paying monthly mortgage repayments. Yes, I am one of those affected too and I am happy to be part of this group too.
Calculations, just calculations
Not too long ago, home loan rate used to be 3%. Today it’s around 4%. Taking a look at the calculation from calculator.com.my, 1% increase in the rate increase the monthly repayment from RM1,897.22 to RM 2,148.37. This is an increase of RM251.15 or around RM8.40 per day. Technically, it is possible to save RM8.40 extra per day if we did not eat at a restaurant but eat at stalls instead. Alternatively buy bread, magarine and kaya and one can save even more. Haha. Okay, so 1% is not crippling unless when we gotten this loan, we were already over-stretched financially yeah.
How about from 4% it goes up to 5% then? Take a look at the picture below. If the interest rate is 5%, then the total repayment per month is RM2,415.70 Compared to the original 3% interest rate, this is an increase of RM518.48 or RM17.30 daily. If we used to have a Coffee Lean latter daily, we can save RM17.30 if we stop having this latte every day yeah. In other words, lifestyle would determine if we could still keep paying the repayment even if interest rate has increased by 2%.
How about 6% rate then? Total repayment is now RM2,697.98 per month. This is an increase of RM800.80 per month or RM26.70 per day. What could one do? Skip the Coffee Bean latte and also eat at the local stall for three meals versus restaurants. What I wanted to tell everyone is that the truth is, we could save a lot of money if we are really pushed to save it. Okay, sometimes, the latte and the air-conditioned restaurant is needed. If that’s the case, the other way is to buy a cheaper property yeah.
What has happened to the interest rates thus far?
The Overnight Policy Rate (OPR) is set by our central bank, Bank Negara Malaysia (BNM). It is a rate a borrower bank has to pay to a lending bank for the funds borrowed.
A lower OPR creates the domino effect of lower interest rates – this is meant to encourage consumer spending and spur borrowing activities which in turn, will stimulate the domestic economy.
A higher OPR, on the other hand, will translate into a higher interest rate and make the borrowing cost expensive for borrowers such as home buyers and businesses.
All the changes in the OPR
Malaysia’s Overnight Policy Rate was maintained at a historical low of 1.75% since it was reduced from 3% in 2020 due to the Covid-19 outbreak, until BNM increase it to 2% on 11 May 2022, 2.25% on 6 July 2022, 2.50% on 8 September 2022, and 2.75% on 3 November 2022. Currently, the OPR remains at 2.75%.
The 1.75% was the lowest OPR on record, according to BNM data that dates back to 2004 on its website.
Changes In OPR Malaysia
| Date | OPR Malaysia |
|---|---|
| March 2023 | 2.75% |
| January 2023 | 2.75% |
| November 2022 | 2.75% |
| September 2022 | 2.50% |
| July 2022 | 2.25% |
| May 2022 | 2.00% |
| July 2020 | 1.75% |
| May 2020 | 2.00% |
| March 2020 | 2.50% |
| January 2020 | 2.75% |
| November 2019 | 3.00% |
Fear not about interest rate, fear about buying the wrong property or over-stretching
One does not lose money until one sells. Thus, when interest rate for loans moved upwards and you could still afford the repayment, one does not lose any money even if property prices drop. Just need to keep paying until the rates come down or one earns more salary. Meanwhile, just remember not to buy the wrong property yeah. For that one, even low interest rates cannot save you. Happy thinking.
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