I have found this information quite an eye-opener, especially to laypersons like us (yes, including me) when it comes to mortgage loans and the Base Lending Rate (BLR).
Interest rate of a loan is commonly taken as an indicator of the cost of a loan, and the borrower's ability to afford said loan. However, as pointed out by an article in Money3.com.my, it is not the most accurate. The interest rate is made up of two components—the BLR and the Spread (Margin). The formula is as following:
Interest Rate = Base Lending Rate (BLR) + Spread (Margin)
While the loan's spread/ margin is usually fixed by the lender (e.g. the Bank) at +1% or -2%, the BLR is a changing variable, and usually overlooked or not fully understood by most borrowers. In Malaysia, the BLR takes into account the institutions cost of funds and other administrative costs related to the loan and is adjustable. Adjustment to the BLR are made almost simultaneously among all banks nation wide, usually during the time in correlation to the adjustments of the Overnight Policy Rate (OPR), determined by Bank Negara Malaysia during Monetary Policy Meeting.
During the few current advertisements we seen, especially on housing loans from banks, 'low BLR' made part of the taglines on every ad. This seems to be an attractive deal, and the BLR for now is not too high, being 6.75% at the present. However, the same cannot be said in a few years’ time; whether if it will increase or decrease (though experts' observation is on the opinion that BLR will be on the rising trend starting from now and onwards). For those cutting down on the spread, let’s not forget that interest rate is the sum of the BLR and the spread. So, particularly for those who are having a BLR-based loan, the sum that you're paying now may not be the sum that you will continue to pay for in the next few years. As a borrower, one should look at the loan being taken over a time period of 25-30 years (the usual payment period for a home loan), instead of just a few years ahead.
Comparing Fixed Rate Loans and BLR-based Loans
Unlike BLR-based loans, fixed rate loans, like its namesake, has its interest rate costs fixed from the beginning, without BLR influence. Fixed rate loans today are offered by a number of Insurance Companies through their mortgage departments, as well as a host of Islamic Banks. Fixed rate loans on offer range from 5.75% with some lock-in period, to 7.25% without any lock-in (no penalty for early settlement). There are even some "hybrids"-- BLR-based loans with rates capped at a maximum rate of 7%-8%.
Compared to a BLR-2% loan (4.75%, with BLR at 6.75%), with the aforementioned fixed-rate loan, a glance would say the former, at 4.75%, would be cheaper, compare to the latter. That is true, if the BLR rate stays at 6.75% throughout the 30 years of your payment term. So, for those choosing a BLR-based loan, go for one with flexible measures or adjustable rates, which will allow you to offset monies kept in deposit against a corresponding sum of the loan's interest. If not, the fixed rate loan will be a safer, more economically affordable choice, with a more stable amount, aside from a clearer view on what you will be paying. Not to mention, in a competitive market now, some fixed rate loan providers will even absorb your entry costs.