First, let's understand what is OPR...
To those who aren’t exactly sure what is OPR - it’s the benchmark for commercial lending and deposit rates, which will be charged by the lending bank to its borrower bank for the borrowed funds.
Additionally, the rate decided isn’t random but takes into account various economic indicating factors, such as inflation, economic growth, possible risks – basically, the overall economic outlook. BNM will adjust the rate according to how much money they want in circulation versus how much is tied up in savings.
So, how will a hike in OPR affect me, financially?
An increase in OPR would mean that banks will increase the base lending rate (BLR) and base financing rate (BFR) which have an impact on a bank’s interest rate. This means...
1. Your monthly instalment payments will increase.
This is especially true if you got loans with a variable (floating) interest rate policy. Whenever the OPR goes up, the interest rates will increase as well, which in turn increases the amount of your monthly instalment payments.
For example, a 30-year loan at the old interest rate of 2.8% would require the borrower to pay RM2,013 monthly until the end of the loan agreement. The 25bps OPR hike would cause monthly payments to increase approximately by 3.1% to RM2,079 or an RM66 increase per month. Meaning that the yearly expenses for the borrower would increase by RM792.
2. The repayment period will become longer due to the increase in interest rate.
If the old monthly instalment amount is maintained, the repayment period will become longer as the interest rate has increased.
3. It'd be expensive to borrow monies.
Note that taking on a loan after the OPR increase will cost more. Again, this is because of the increase in the loan interest rate. Hence, the affordability to buy a car or servicing an existing house loan would be limited.
Not only that. Historically, the banks may be more cautious when it comes to approving loans – higher OPR, lower approval rate.
4. Interest earnings from savings and fixed deposits will increase.The good news is if you have substantial savings or are investing in fixed deposits, do know that the increase in OPR is something for you to be happy about. Why? This is because the interest rates on these accounts will increase as well, which means you'll earn more. Kaching!
Perhaps, you want to re-assess your savings or investment strategy so that you can get optimal returns.
Okay, what are the impacts when there's a cut in OPR?
1. Your cost of borrowing will be lessened.Similar to a hike in OPR, a low OPR would trigger the local banks to adjust their lending base rate (BLR) and base financing rate (BFR). This would then indirectly affect the interest rates - which means borrowers would see a reduction in their monthly payments.
So, whether it’s a credit card, car loan, personal loan, or home loan, you will benefit from the low OPR. As a consumer, your spending capacity will increase and you’d be able to save more. Not to mention, you’d also be able to make repayment for a shorter period.
2. It’s a great time to invest in Malaysian real estate investment trusts (M-REITs).
The good thing about low OPR is that the lower interest payments can guarantee more savings and a larger disposable income for you investors out there. You could also increase your investment.
In 2020, Affin Hwang Capital Research shared that over the long run, a low OPR should also lower the finance costs of MREITs and lift earnings, although the impact on near-term profit is minimal.
So, what are your thoughts on the new OPR? Share with us.
*The above article is intended for informational purposes only. Loanstreet accepts no responsibility for loss that may arise from reliance on information contained in the articles