BR, BLR & SBR: What's New and What's Changed?

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What are the differences between these three rates and how do these rates affect consumers’ housing loans?

Interest rates are some of the most influential components of the economy. They help shape the day-to-day decisions of individuals and companies, such as determining whether it’s a good time to buy a house, take out a loan, or put money in savings. 

A clear understanding of interest rates such as the Base Rate (BR), Base Lending Rate (BLR), and Standardised Base Rate (SBR) is important for consumers to compare the retail loan products offered by each financial institution and make informed decisions about borrowing and saving.

Without further ado, let’s get into these key terms!

Base Lending Rate (BLR) – Before 2015

For homebuyers applying for a home loan for the very first time, they’re probably wondering what the Base Lending Rate (BLR) is and why it’s such a major concern.

Since its introduction in 1983, the Base Lending Rate (BLR) has served as the main reference rate for floating rate loans in Malaysia. 

Without delving into the details of floating rates, it is helpful for consumers to note that a floating rate loan refers to a loan with a variable interest rate that changes over the duration of the debt obligation based on market conditions. It is the opposite of a fixed interest rate loan, where the interest rate remains constant throughout the life of the debt. Generally, floating-rate loans are lower than fixed-rate loans, reducing the overall cost of borrowing for the debtor.

Coming back to the topic, the BLR was set by Bank Negara Malaysia (BNM) based on how much it costs to lend money to other financial institutions. It is basically the base interest rate that banks refer to internally before deciding how much interest rate they would charge for a consumer’s home loan. 

It is imperative to keep in mind that the cost to borrow money changes according to the movement of the Overnight Policy Rate (OPR), which is the minimum interest rate that BNM issues for banks to lend funds to one another. Hence, when the OPR gets cut, the BLR reduces, and so does the consumers’ borrowing cost.

The purpose of the BLR system was to create a fixed and predictable interest rate across all the banks in the country, where the latest rates could easily be found online. This resulted in similar home loan rates across all the banks in Malaysia.

How can consumers calculate their interest rate based on the BLR? Here is an example: If a bank’s BLR is 6.80% and its lending rate is 2.45%, it will charge an interest or Effective Lending Rate (ELR) of 4.35% to the consumer.

On another note, there is also the Base Financing Rate (BFR), which is the BLR equivalent for Islamic loan products to purchasing a property.

Base Rate (BR) – January 2015 onwards

The revised Base Rate (BR), which came into effect on 2 January 2015, replaces the Base Lending Rate (BLR) as the main reference rate for the new retail floating rate loans, including residential property loans. 

The BR is also known as the minimum interest rate of a bank below which the bank is not allowed to lend to its customers following the newly introduced reference rate framework by Bank Negara Malaysia (BNM). Essentially, the revised BR serves as a reference rate from BNM that banks use to decide on the interest rates of consumers’ loans and savings.

For additional clarity, the new reference rate framework, also known as the Base Rate (BR) framework, will be used by financial institutions as a basis for pricing upcoming retail loans tied to a reference rate. Unlike the BLR system, a reference rate is typically linked to the bank’s cost of funds. Hence, the reference rate allows banks to vary floating lending rates to reflect changes in their funding costs that could arise from changes in Bank Negara’s policies and general market funding conditions.

Under this reformed framework, the BR is computed based on the banks’ benchmark cost of funds and the Statutory Reserve Requirement (SRR) imposed by Bank Negara Malaysia. Besides, the loan or financing pricing is also calculated against other components such as borrower credit risk, liquidity risk premium, operating costs and profit margin that will be reflected in a spread in the BR framework. 

Why Do Base Rates Change?

The BR will be adjusted when there are changes in the marginal cost of funds due to monetary policy changes such as a hike or cut in the Overnight Policy Rate (OPR) and/or changes in the funding conditions such as the movement in Kuala Lumpur Interbank Offered Rate (KLIBOR). This is because the BR is pegged to BNM’s Overnight Policy Rate (OPR).

Although the BR is highly dependent on the OPR where banks will benchmark their BR against the Statutory Reserve Requirement (SRR), banks can revise the BR anytime even if there are no changes to the OPR.

However, to minimise excessively frequent adjustments to the BR, banks are allowed to revise the BR only at quarterly intervals apart from changes resulting from an OPR cut or hike. 

Why the change from BLR to BR?

Source: Bank Negara Malaysia

According to Bank Negara Malaysia (BNM), the BLR has become less relevant as a basis for loan pricing. This is because the nature of the BLR system which employs a fixed rate across all banks has led to some banks crafting loan products with retail lending rates being offered at substantial discounts to the BLR.

One key aspect of the BR is that it is more transparent and fair to borrowers. This is because the BR system forces banks to disclose their profit margin, also known as the loan spread rate, while encouraging healthy competition among banks to provide a wider range of cost-efficient options for loan applicants.

Under this cost-plus structure, the spread rate will always be positive as it would not be possible for banks to offer lending rates below the reference rate. Here is an example: if a bank’s BR is 3.30% and its interest rate margin is +1.35%, the ELR charged to the consumer is 4.65%.

Source: Bank Negara Malaysia

The BLR also lacks transparency as it also included the cost of managing liquidity risk, profit margins and operating costs in addition to the cost of funds and the Statutory Reserve Requirement (SRR) in crafting an interest rate. This makes it difficult for consumers to make an informed decision. 

Here is the comparison of the BLR and BR frameworks which will come in handy!

How does the BR affect property owners and consumers?

Under the new BR framework, borrowers and financial institutions are expected to benefit from the upgraded system as it facilitates a more effective transmission of monetary policy changes to the economy. Banks can now determine their own interest rate based on their own benchmark cost of funds and liquidity, following a formula set by the BNM.

Unlike the BLR which allowed changes in factors other than those related to the funding costs to be reflected in the lending rate after the loan has been contracted, the lending rate of a BR-based loan will vary only in response to changes in funding costs. As the funding costs are referenced off money and financial market rates that are readily visible to borrowers, there will be an increase in the transparency of changes to the BR. 

The BR is set by the banks themselves without any intervention from BNM. As such, the new framework gives financial institutions the flexibility in choosing the appropriate benchmark money or financial market rate to appropriately reflect the cost associated with making the loan. Ultimately, it benefits consumers as banks will now have to set their BR based on their individual efficiencies. 

For example, banks with a strong performance in consumer financing such as Maybank and Public Bank will have the initial edge to offer more attractive home loan packages.

Transition from BLR to BR

In addition, it should be noted that housing loans that were applied for prior to 2 January 2015 under the BLR will still follow the BLR rates to the end of the loan tenure. The BR is only applicable to housing loans applied for from January 2015 onwards. 

However, it also depends on the agreement consumers signed with the bank. Property owners may look into refinancing options with their bankers to take advantage of more attractive packages offered in the market.

As such, banks are obligated to display both the BR and the BLR rates at all branches and websites for consumers to know.

Here’s a table of the latest BR, BLR, and Indicative Effective Lending Rates (ELR) taken from BNM.

Latest BR, BLR & ELR as of 6 August 2020

According to BNM’s Reference Rate framework, banks are required to disclose an Indicative Effective Lending Rate (ELR), also known as the loan’s interest rate, for a standard housing loan or home financing product priced against the BR to keep consumers informed through their websites and at all branches.

Indicative ELR refers to the indicative annual ELR for a standard 30-year housing loan or home financing product with a financing amount of RM350,000 for 30 years and has no lock-in period. As such, it is wise for borrowers to compare the ELR quoted by different banks before taking out a new loan.

Standardised Base Rate (SBR) – August 2022 onwards

On 11 August 2021, BNM released a revised Reference Rate Framework, which stated that a Standardised Base Rate (SBR) will replace the BR as the reference rate for new retail floating rate loans effective 1 August 2022.

Under the revised reference rate framework, the SBR will be linked solely to the Overnight Policy Rate (OPR). Therefore, changes to the Standardised Base Rate will only occur according to changes in the OPR, which is determined by the Monetary Policy Committee of Bank Negara Malaysia. 

Other components of loan pricing such as borrower’s credit risk, liquidity risk premium, operating costs, profit margin and other costs will still be reflected in the spread above the Standardised Base Rate.

How will the SBR affect property owners and consumers?

The move to SBR helps consumers to make more informed decisions as it is easier to understand that repayment instalments will only change when there is a change in the OPR, unless there is an increase in a borrower’s credit risk, for example, if they fail to make repayments. 

This offers greater transparency and comparability of loans across all banks in Malaysia as all banks will use a single rate, unlike the existing framework where banks can set their own BR which is different for each bank.

With the new SBR system, consumers no longer need to compare the differences in varying BR methodologies across banks. This makes it easier for consumers to see which banks are charging lower spreads.

Additionally, after a borrower enters into a loan contract with their bank, the bank is not allowed to increase the spread during the tenure of the loan, except when a borrower’s credit risk profile changes. In comparison, currently, a bank may change its Base Rate because of changes in its funding costs, making it difficult for consumers to set a budget in the long term.

How does the change to SBR affect consumers’ existing and future loans?

BR- and BLR-based loans taken before 1 August 2022 will continue to be priced against the BR and BLR until the loan is fully repaid. Hence, the shift towards the SBR will have no impact on the effective lending rates of existing retail loans.

From 1 August 2022 onwards, the BR and BLR, just like the SBR, will all move exactly in tandem with the OPR. This means that if the OPR increases by 0.50%, the BR or BLR will similarly increase by 0.50%. In terms of future loans, loans taken from 1 August 2022 onwards will be priced against the SBR.

What else to look out for when buying a property?

The SBR may be fixed but borrowers can also negotiate for a better spread or interest rate to obtain a lower ELR. Of course, borrowers should ensure that they have a favourable credit rating beforehand as the spread largely depends on the borrower’s level of credit risk.

Borrowers should also request the Product Disclosure Sheet (PDS) as it provides key information on financial products offered by financial institutions, which includes the ELR and total repayment amounts for the loan facility.

Besides, borrowers should assess their Debt Service Ratio (DSR) to know how much income they can set aside every month to service their loan, as well as to determine if they can continue to afford the housing loan repayments if the Effective Lending Rate increases in the future.

总结

The new reference rate framework is a further step towards a more mature financial landscape in the country. The updated SBR would allow banks to effectively manage interest rate risk that is fair and transparent to borrowers and will help to facilitate easier comparison and assist borrowers in making an informed financial decision. 

Going forward, the revision of the framework allows reference rates to evolve as borrowers become more sophisticated in making better money choices when it comes to navigating an array of loan products offered by different banks. Financial institutions will be able to offer a range of products based on an assessment of a borrower’s credit standing, funding conditions and business strategies. 

All in all, the new SBR mechanism will also facilitate to achieve BNM’s intended objectives of increasing the transparency of loan pricing and improving the efficiency of monetary policy transmission, which ultimately benefits both property owners and consumers.