Most people who apply for a home loan from a bank normally tend to “shop around” and look for home loans from banks that offer lower interest rates before submitting their applications.
However, first-time buyers who are just beginning to dip their feet in home purchasing and learn about mortgages and application processes might be confused with the numbers and technical terms that come with these home loans.
As a first-time home buyer, you might be wondering, what exactly is the Base Rate (BR) and the Standardized Base Rate (SBR), and how are they different from each other?
Read on for an explanation of the three interest rates that Bank Negara has historically used – the Base Lending Rate (BLR), the Base Rate (BR) and the Standardized Base Rate (SBR) which will launch in August this year, and how they affect home loans!
| 1. What are BLR, BR and SBR rates? |
1. What are BLR , BR and SBR rates?
The Base Lending Rate (BLR), Base Rate (BR) and the latest Standardized Base Rate (SBR) are all base rates introduced by Bank Negara Malaysia at different times as reference rates for banks to set loan interest.
The reason why Bank Negara has introduced different base interest rates is to replace the old base interest rate mechanism to ensure the transparency of mortgage interest rates, and help borrowers obtain more favorable loan interest rates.
Base Lending Rate (BLR) (before 2015)
Before 2015, the interest on home loans was based on the Base Lending Rate (BLR).
Banks will set an appropriate loan interest rate based on their own borrowing costs, the interest they want to earn, the BLR and the Overnight Policy Rate (OPR) set by BNM.
However, the BLR was officially discontinued on January 2, 2015, and was replaced by the Base Rate (BR), which calculates loan interest.
Before 2015, the bank’s mortgage interest was calculated as follows:
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BLR reference rate + interest earned by the bank = actual loan interest Example: 5.4% – 2% = 3.4% |
Base Rate (BR) (January 2, 2015 to July 31, 2022)
Bank Negara believes that the BR rate is more transparent than the framework of the BLR rate, which not only improves competition among banks, but also helps borrowers to obtain more favorable bank interest rates.
Therefore, from January 2, 2015, the BR rate replaced the BLR rate, and banks based on borrowing costs, liquidity, Statutory Reserve Requirement (SSR), operating costs, profit margins, loan applicants, borrowing risks and the Overnight Policy Rate (OPR) to calculate loan interest.
Simply put, the bank will use the OPR as a benchmark, and then adjust the BR and mortgage interest accordingly.
Therefore, the BR of each bank will be different, and the borrower needs to compare the BR and interest of each bank to find a more favorable bank interest.
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BR reference rate + interest earned by the bank = actual loan interest Example: 2% + 1.4% = 3.4% |
Standardized Base Rate (SBR) (from 1 August 2022)
The Standardized Base Rate (SBR) is not a new reference rate framework introduced by Bank Negara or the government.
In August last year, Bank Negara announced that the SBR would replace the existing BR on August 1 to make the entire lending mechanism more transparent.
The standardized base interest rate will be fully synchronized with the OPR, and the SBR of various banks will also be unified. It will also be easier for borrowers to compare the loan interest rates of banks.
In simpler words: Standardized Base Rate = OPR = Bank SBR Rate.
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SBR reference rate + interest earned by the bank = actual loan interest Example: 2.25% + 1.65% = 3.9% |
2. The impact of implementing SBR on borrowers
When Bank Negara announced that BR will be replaced by SBR starting from August 1, many people wonder what the impact on their existing loan interest will be. Will it be higher or lower?
The interest rate is linked to Bank Negara’s adjustment of the overnight policy rate (OPR); when Bank Negara lowers the OPR, the bank will also adjust the BLR, BR and SBR.
However, what impact does the SBR have on existing and future borrowers?
For future borrowers who have successfully obtained bank loans and signed housing loan contracts starting August 1, 2022, the SBR framework will be implemented to calculate interest.
Borrowers who have obtained bank loans and signed home loan contracts prior to August 1, 2022, and those whose loans are of fixed interest will not be affected in any way.
If you feel that the implementation of SBR has caused the existing loan interest to increase, you can consider refinancing the relevant loan, but refinancing comes with its own set of risks. It is recommended that you consult with a professional before making your decision.
We hope this article has helped clarify the why loan interest rates vary between banks. Before applying for a bank loan, be sure to compare interest rates of various banks to ensure you get a loan that best fits your needs.
Do you think the new SBR rate will bring you greater borrowing benefits?
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