Overnight Policy Rate (OPR) may change over time. Although there is no definite cycle, it is regulated depending on the country's economy.
Let us simplify the concept for you. When applying for a loan, you are not the only one who borrowed the money, but banks too. Every bank needs to maintain its cash liquidity, thus loaning from other banks would be the policy. An amount of interest is charged to the borrower bank during that interval and this is called Overnight Policy Rate.
Malaysian central bank, Bank Negara will continually evaluate whether the OPR should be maintained, lowered, or increased. Begin March 2018, the OPR has shown a significant percentage decreased.
3.25% > 3% > 2.75%
On 3rd March 2020, Bank Negara has lowered the OPR cut to 2.5%, showing a 0.75% gap after a year, due to the COVID-19 outbreak. OPR cut will eventually trigger commercial banks to cut their base rate, thus less interest rate for the consumers to pay.
Let's assume the loan amount is RM400,000 with a tenure of 35 years. The 0.25 % reduction of OPR will save you about 7%, which is RM31,3116 from the total interest payment over the loan period, and almost 4% of monthly savings.
If you are planning to apply for a loan, or already bounded with one, it is beneficial to understand a few takeaways from OPR changes.
If you have an ongoing installment, what you need to do in response to OPR adjustment is contacting your banker and acquire confirmation on changes of the BR rates & monthly installment.
Applying for a New Loan
This might be the right timing for you to be on the lookout for a new house because OPR cut lead to interest cut as well. More savings to your side and a good opportunity for you to find the lowest interest rate offered by banks. You may:
-Base Rate (BR): Interest rate determined by the banks based on the formula set by Bank Negara.
The rate cannot be less than ELR.
-Effective Lending Rate (ELR): The interest rate that consumers have to pay (BR + Interest Rate Spread)
-Interest Rate Spread (IRS): Difference between interest rate banks pay & Interest rate banks received