What is the Overnight Policy Rate, and how does it affect consumers’ housing loans?
For a first-time buyer, buying a home can seem overwhelming. As you can imagine, there are a number of steps, tasks, and requirements, and mistakes can be costly. In order to make smart decisions about purchasing your next home, one thing homebuyers need to know is the Overnight Policy Rate (OPR), which is an invaluable tool to reflect Malaysia’s monetary policy.
It can impact a wide range of critical financial metrics such as borrowing rates, lending rates, foreign exchange rates, and perhaps most importantly – home loan interest rates. Hence, a thorough understanding of the OPR can protect property seekers from any pitfalls they might encounter during the homebuying process, and ensure homebuyers reap the benefits of the OPR to the fullest extent possible.
So, what is the Overnight Policy Rate (OPR) all about, and how does it affect the property market and home loans?
What is the Overnight Policy Rate (OPR)?
The Overnight Policy Rate (OPR), set by our central bank, Bank Negara Malaysia (BNM), is the general interest rate charged among banks in the interbank market, in which banks borrow funds from one another.
It is a rate a borrower bank has to pay to a lending bank for the funds borrowed. Why “overnight”? Because interbank lending usually occurs overnight. Banks lend out as much money as they can in terms of loans while maintaining the minimum amount of cash that Bank Negara requires. However, when a bank has a fund deficit to meet the withdrawal demand from depositors, the bank will borrow from another bank with an excess fund, which is where a lending bank makes an interest rate, and where the OPR comes into play.
As mentioned earlier, the OPR is determined by the Monetary Policy Committee (MPC) of Bank Negara Malaysia, which meets six times annually. The OPR greatly influences interest rates in other markets, including the credit market as the OPR is the primary reference rate.
An increase in OPR will immediately increase bank borrowing costs, resulting in a chain reaction. When the OPR is lowered, other interest rates in the market, such as the Base Rate (BR) or Base Lending Rates (BLR) of commercial banks will be guided accordingly, and vice versa.
Role of Overnight Policy Rate (OPR) in the Economy
The direction of OPR, either going down or upward, depends on a country’s economic condition and outlook. Ultimately, the goal of revising OPR is to bring the economy to an optimum level and avoid recession.
OPRs are revised downward when economies grow at a slower rate to reduce interest rates. Lower interest rates allow consumers and businesses to have access to money at lower borrowing rates, thereby encouraging them to increase spending and investment. As more people will be inclined to withdraw money and spend, this will help to boost the economy overall and drive growth in the domestic market.
In contrast, when an economy grows faster, the OPR will be revised upward to increase interest rates. Higher interest rates make borrowing costs expensive for consumers and businesses, resulting in lower spending and investment. This will prevent consumers and businesses from overspending, which could lead to increased inflation for the country as a whole.
Overall, the OPR is an effective tool to manage consumer spending habits. When the country experiences strong economic growth, Bank Negara Malaysia (BNM) will consider higher OPRs, which also mean higher interest rates that attract savings in the banks, discourage unnecessary borrowing and encourage responsible spending.
So, what are the latest OPR rates?
Recent Overnight Policy Rate Adjustments
As of 6 July 2022, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.25% – a 0.25% hike compared to its previous rate adjusted in May 2022.
For better understanding, here are some of the previous OPR changes announced by BNM:
22 January 2020 — OPR cut by 25 basis points to 2.75% This was an unexpected OPR reduction by the MPC as a pre-emptive measure to mitigate downside risks arising from a volatile external environment and policy uncertainties as well as to sustain the country’s economic growth with price stability.
3 March 2020 — OPR rate cut by 25 basis points to 2.50% The decision was intended to provide a more accommodative monetary environment to support the projected improvement in Malaysia’s economic growth amid the global Covid-19 outbreak.
5 May 2020 — OPR rate cut by 50 basis points to 2.00%, a level last seen during the 2008-2009 global financial crisis.The last time Bank Negara made a 50bps rate cut to 2% was on 24 February 2009. BNM noted that global economic conditions have weakened significantly, with measures to contain Covid-19 causing economic disruption worldwide.
7 July 2020 — OPR cut by 25 basis points to 1.75%, the lowest level ever on records dating back to 2004.The revision was made to help the economy recover from the impact of Covid-19 on the Malaysian economy, as well as the weak global economic conditions.
11 May 2022 — OPR rate hike by 25 basis points to 2.00%, the first increase in nearly 2 years since the rate reached a record low of 1.75% in July 2020. The revision was driven by inflationary pressures arising from the reopening of the global economy and the improvement in labour market conditions.
6 July 2022 — OPR rate hike by 25 basis points to 2.25% The revision was driven by the positive growth prospects for the Malaysian economy and the improvement in labour market conditions which continues to support the recovery of economic activity.
As seen above, due to the weak economic conditions caused by the Covid-19 pandemic, the OPR was reduced four times between January and July 2020 to provide better support for the economy. However, as of 11 May 2022, the Monetary Policy Committee (MPC) of BNM has decided to begin reducing the degree of monetary accommodation, and yet another OPR hike on 6 July 2022 as a reflection of the economic rebound supported by strong domestic growth and the reopening of the global economy.
BNM assures that the calibration will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support the economy’s gradual recovery amid the higher inflation environment.
How does the Overnight Policy Rate (OPR) affect Housing Loans?
As mentioned before, the Overnight Policy Rate (OPR) is a benchmark for the market interest rate. Changes in the direction of the OPR will impact the interest rates on loans in the market.
When it comes to home loan products, the OPR has a direct influence on a bank’s Base Rate (BR), Base Lending Rate (BLR) as well as the Standardised Base Rate (SBR). This is because the BR is pegged to BNM’s Overnight Policy Rate (OPR). Hence, it is vital to note that the BR, BLR and SBR usually reduce or increase in tandem with an OPR cut or hike.
Why should homebuyers care about the Overnight Policy Rate?
When the OPR is lowered, it will have two notable effects on consumers’ finances – lower interest rates on loans and decreased savings returns. Consumers should not expect to see high rates of return on savings accounts and fixed deposits when the OPR is low.
For homebuyers, the cost of borrowing will be lessened when the OPR decreases. A lower OPR would trigger banks to lower their BLR and Base Financing Rate (BFR). This would then indirectly affect the interest rates for those who hold existing home loans at a variable rate – which results in lowered costs for borrowing or refinancing an existing home loan.
What does the Overnight Policy Rate reduction mean for homebuyers?
Lower loan interest rates
With the Overnight Policy Rate reduction, this means that consumers are now able to obtain loans from the bank at a lower rate, making owning a new home even more accessible. It will be cheaper for new property purchasers to take up a home loan product as they could leverage on the lower initial interest rate. This is because there will also be a reduction in the effective lending rate (ELR) of existing home loans which are using a variable or floating rate.
The Overnight Policy Rate cut also means borrowers will benefit from either a lower monthly repayment amount over the same loan period or the same repayment over a shorter period. Either way, this is the best time for consumers to look for new housing loans.
For example, if a buyer’s home loan is pegged to the BR, and given that the OPR cut will lead to a lower home loan interest rate, this means that the homebuyer will be paying lower monthly repayments. Here’s an example of how this works:
Base Rate of Example Bank (before and after OPR cut)
BR: 2.90% – 0.35%
Home Loan Interest Rate
(2.90% + 0.8%)
(2.55% + 0.8%)
Total interest paid
over 35 years
Based on the example above, if a borrower’s loan is RM500,000 for 30 years, a 0.25% reduction will help to reduce his or her repayment by RM69 a month, which will result in RM25,078 savings over a 30-year loan tenure based on the example above. This means that the borrower is paying around 8% less in interest payments over the loan tenure.
However, it is pertinent to note that existing borrowers who have taken up a fixed deposit rate home loan will not see any changes in their monthly instalment payments.
Lower returns for savings accounts and fixed deposits
On the other hand, the natural trade-off is that a lower OPR means a lower saving and fixed deposit rate. Together with the cut in OPR, these savings instruments will have their interest rates lowered. Therefore, consumers must reassess their savings or investment strategy to achieve a more comfortable financial future. However, it won’t affect any fixed deposits that consumers have placed prior to the bank’s revision of fixed deposit rates.
What does the OPR hike mean for homebuyers?
When Bank Negara raises the Overnight Policy Rate, banks’ interest rates will be revised upward, making it more expensive for consumers to get a loan. It means that banks will increase the base lending rate (BLR) and base financing rate (BFR) because a rise in the Overnight Policy Rate would directly influence both rates. Therefore, this will result in a higher interest rate for housing loans that are pegged to BLR or BFR.
A higher OPR will either increase the monthly instalment payments for existing borrowers as banks will pass on the higher borrowing cost in the form of a higher interest rate to consumers, or increase the loan tenure if a borrower’s monthly instalment amount is maintained. If there are no changes to the monthly instalment amount, the repayment period will become longer due to the increase in interest rate.
However, it is not all doom and gloom if the OPR increases. The increase in interest rates for loans would then also mean that fixed deposit interests and saving account interests will also rise in tandem too. Due to the OPR increase in the interest rate, consumers with substantial savings will benefit from a higher return on their savings.
The OPR serves as a vital financial guide for local banks to determine their own lending rates, both to each other and to consumers. It is used to manage the supply and demand for money in the market and forms the backbone of monetary policy, which will ultimately affect the country’s employment, economic growth and inflation. In other words, it serves as an indicator of the overall health of the banking system and the economy of a country as a whole.
The OPR adjustment is part of a measure to stimulate spending and economic activity amid a cautious environment – due to the Covid-19 impact on Malaysia’s economy. If you’re in need of a housing loan, you can take advantage of the lower interest rate and apply for it now as interested buyers might still be able to negotiate into an initial agreement at a reduced interest rate. As for current loan payers, they will be glad to know that some of their current monthly interest repayments are likely to be reduced. This means consumers will be able to see a hike in their disposable income and will have more cash on hand to spend!
With that, it is important for consumers to make savings a basic rule of thumb, especially in times of crisis, and reallocate any additional savings strategically. Last but not least, do not underestimate the difference of a few percent in interest rate, as it can impact consumers’ total repayment amount and help all property purchasers save more money by the end of their loan tenure!