A Sudden Increase in Monthly Payments: What You Need to Know
Since 2022, Bank Negara Malaysia (BNM) has raised the Overnight Policy Rate (OPR) by more than 100 basis points, increasing it from 1.75% to 3%. This means higher borrowing costs, significantly impacting homeowners with mortgages. With inflation rising and the economy still recovering from the pandemic, this hike has created financial strain for many borrowers.
So, what exactly is OPR, and how does it affect your mortgage? More importantly, what can you do to manage your finances amid rising interest rates? In this article, we will explain OPR, how it affects loan interest rates, and strategies to reduce the financial burden of increasing monthly repayments.
What is OPR?
The Overnight Policy Rate (OPR) is the interest rate set by Bank Negara Malaysia (BNM) for interbank lending. In simple terms, it dictates how much banks must pay when borrowing from each other overnight to manage liquidity.
When OPR increases, banks face higher borrowing costs, and they pass this cost to consumers by raising loan interest rates. Conversely, when OPR decreases, borrowing costs drop, leading to lower loan rates.
Since its introduction, OPR has fluctuated multiple times, with the most significant drop occurring during the COVID-19 pandemic when BNM lowered it to 1.75% to stimulate the economy. However, to combat inflation and strengthen the Malaysian Ringgit, BNM has since raised OPR back to 3%.
How OPR Affects Your Home Loan Interest Rates
BR, BLR, and SBR: Understanding the Basics
Before 2015, Base Lending Rate (BLR) was the standard reference rate for home loans. However, it was directly controlled by BNM, leading to inefficiencies and inconsistent lending practices. To create a more market-driven system, BNM replaced BLR with the Base Rate (BR), allowing banks to set their own lending rates based on their funding costs and risk factors.
In August 2022, BNM introduced the Standardized Base Rate (SBR) to simplify loan rate comparisons across banks. The key difference is that SBR is directly linked to OPR, meaning any changes in OPR automatically affect your home loan rate.
For example, if your home loan is structured as SBR + 1.55%, and the current SBR is 2.5%, your loan interest rate is 4.05% (2.5% + 1.55%). If BNM reduces OPR by 0.25%, your rate will adjust to 3.8% (2.25% + 1.55%).
However, if your mortgage is based on the old BLR or BR system, your interest rate calculations may differ and depend on your loan agreement.
OPR’s Direct Impact on Mortgage Payments
Many homeowners mistakenly believe that OPR changes only affect new borrowers. However, this is incorrect because most Malaysian home loans are flexible (flexi-loans), meaning they are directly impacted by changes in OPR.
When OPR increases, home loan interest rates rise, leading to higher monthly repayments. Conversely, when OPR decreases, borrowers may enjoy lower repayments, but future hikes remain a risk.
To illustrate the impact of OPR hikes, consider a loan amount of RM1,000,000:
Loan Amount | Interest Rate Before Hike | Monthly Repayment Before Hike | New Interest Rate (+0.75%) | New Monthly Repayment |
RM1,000,000 | 3.30% | RM4,020 | 4.05% | RM4,460 |
RM500,000 | 3.30% | RM2,010 | 4.05% | RM2,230 |
RM300,000 | 3.30% | RM1,210 | 4.05% | RM1,340 |
Even a 0.75% increase in OPR leads to a nearly 11% increase in monthly repayments, and the total interest paid over the loan tenure rises by up to 27%.
Should You Shorten Your Loan Tenure?
Many borrowers consider shortening their loan tenure to reduce total interest payments. However, doing so increases monthly repayment amounts, which may strain cash flow.
Loan Amount | 35-Year Loan | 20-Year Loan |
RM500,000 | RM2,230 | RM3,030 |
RM300,000 | RM1,340 | RM1,850 |
While a shorter tenure reduces total interest paid, it increases monthly repayment obligations. If your cash flow is unstable, extending the tenure may be a safer option.
What Can You Do to Manage Higher Loan Repayments?
1. Maximize Your Flexi-Loan Benefits
If you have a flexi-loan, you can make additional payments towards your principal to reduce interest charges. At the same time, you retain the flexibility to withdraw funds when needed, giving you a financial safety net.
2. Consider a Repayment Assistance Program
Many banks offer Repayment Assistance Programs, allowing borrowers to reduce monthly repayments by extending their loan tenure. If you are struggling with rising repayments, contact your bank for available options.
Here are the official links to major banks offering repayment assistance:
Public Bank
Maybank
RHB
Hong Leong Bank
OCBC
CIMB
UOB
3. Keep Track of Your Loan Notifications
Banks will notify customers of interest rate adjustments via letters or emails. If you have not received any updates, ensure your contact details are up to date with your bank.
4. Improve Cash Flow Management
Avoid over-leveraging when buying a property. While full cash purchases are ideal, if you rely on financing, ensure you maintain sufficient emergency savings to handle sudden rate hikes.
Conclusion
Rising OPR and increasing home loan rates affect not just individual borrowers but the entire economy. As a homeowner, you should plan for future interest rate hikes, maintain a stable cash flow, and explore flexible repayment options to avoid financial strain.
When rates decrease, consider making extra payments on your loan principal to save on interest costs. By staying proactive and financially prepared, you can better manage your home loan repayments in any economic climate.