The overnight policy rate (OPR) is an important part of Malaysia’s monetary policy. It can impact a wide range of important financial measures such as deposit rates, lending rates, foreign exchange rates, and crucially – home loan interest rates.
But what is OPR, and what does it really mean for you when it comes to owning a home?
What Is Overnight Policy Rate (OPR)?
OPR is an overnight interest rate set by our central bank, Bank Negara Malaysia (BNM) that determines the rate of interest for financial institutions that lend each other money overnight.
On a day-to-day basis, banks tend to have changing levels of cash reserves, dependent upon the lending activities of the bank, and the deposits and withdrawals of its customers.
That means if everyone decides to take out their money to buy Rihanna tickets on the same day, a bank might a) question how much Rihanna tickets cost and b) need to borrow some money from another bank to keep appropriate cash reserves.
In order to balance the available levels of cash (otherwise known as liquidity), banks with large cash reserves on a particular day often lend to banks with a cash shortfall in order to ensure a stable and liquid banking system.
Think of it like going to the mamak before you realise how hungry you are, and having to borrow cash off a friend. Then you pay them back the next day.
Of course when it comes to monetary policy, it’s a bit more complex than buying yourself a big pile of nasi lemak!
Why Is OPR So Important?
It might seem like clever cash juggling, but the need to lend cash between banks is an established and important part of a well-functioning financial system. Oh, and did we mention that whole home loan interest rates thing?
Banks rely on lending as an important commercial activity, meaning balancing their available cash reserves is vital to meeting the requirements of liquidity set out by BNM.
This is sometimes called a reserve requirement, as in the amount of cash a bank has to hold in reserve. That part at least is easy enough to explain!
Bank interest rates defined by OPR provide the framework for monetary direction on a national level that ensures banks have a stable supply of available cash.
Because the OPR is so fundamental to the workings of our banking system, changes to the OPR rate often have a domino effect on a range of other economic factors beyond simply lending rates.
For example, employment and inflation on the cost of goods.
What Are The Recent Overnight Policy Rate Changes And Why?
As of May 2022, Bank Negara Malaysia has announced a revised rate for the OPR which now stands at 2.00% – a 0.25% hike compared to its previous rate that lasted for almost two years!
For context, these were the last OPR changes announced.
7th July 2020 — OPR rate cut by 25bps to 1.75%, the lowest level on record
5th May 2020 — OPR rate cut by 50bps to 2.00%
3rd March 2020 — OPR rate cut by 25bps to 2.50%
22nd January 2020 — OPR rate cut by 25bps to 2.75%
Due to the COVID-19 pandemic, the OPR was reduced to provide better support for the economy. However, with the reopening of global economies and strong domestic growth, the Monetary Policy Committee (MPC) of BNM has “decided to begin reducing the degree of monetary accommodation,” according to their official statement.
While it may sound scary at first, BNM assures that it will be carried out in a well-measured and gradual manner to be able to support the nation’s sustainable economic growth amidst an environment of price stability.
How Does The Overnight Policy Rate Impact The Housing Sector?
The higher the OPR is set, the more expensive it is to borrow money. The more expensive it is to borrow money, the more limited the affordability of accessing capital becomes for both personal and commercial purposes.
If it costs more to lend, less people can do it. That can have a notable impact on the housing sector.
The other side of that coin is that lowering the OPR has a positive effect on the affordability of capital, reducing interest rates and generally making lending more affordable for more people.
How Does OPR Affect Housing Loans in Malaysia?
When the OPR increases or decreases, so do the interest rates on loans. That can benefit both a large number of existing home loan holders, as well as people looking to access a new home loan for a property purchase.
A reduction in OPR benefits people who hold existing home loans on a variable rate. Those rates are often pegged against the Base Rate (BR) and Base Lending Rate (BLR) recommended by Bank Negara Malaysia.
Without diving into the complicated details of the BR and BLR itself, it’s important to understand that a reduction or hike in the OPR also leads to a reduction or hike in the BR and BLR set by banks.
That means the recent changes by BNM to the OPR may have an effect on interest rates charged on variable home loans. But don’t worry, not all monetary policy is designed to make things more expensive!
Although the OPR has increased recently, it is still manageable for buyers or people looking to access new home loans. The highest rate ever recorded was back in 2008 where the OPR was 3.5%! Taking that into consideration, interested buyers will still be able to enter into an initial agreement at a lower interest rate. It might not be the lowest now, but it’s still pretty decent.
Variable loans will adjust more rapidly than fixed-rate loans, and realistically, a long period of lower interest rates is often required before any significant shifts in fixed-rate loan rates are realised.
So if you’re looking for a variable loan, you’re onto a winner. If you’re holding out for a fixed-rate loan… it’ll take a lot longer for changes to establish in the system. Sorry fixed raters.
What does all that mean overall? It’s a broadly positive move for those of you searching for affordable home loan interest rates.
Should I Buy A Home When the OPR Falls?
To say that the OPR rate falling is good for buying a house is TOO simple a conclusion to make. It’s certainly true that the affordability of financing enjoys some positive benefits from these falling rates.
If your home loan is cheaper, you’ve got more opportunity to find (and afford) the right home for you.
But remember that OPR rates are variable, and have changed several times in the past few years.
You can’t bank your entire home loan amount on the current rates, and you should always think of the future when making a major financial decision like purchasing a property (or a ticket to Rihanna).
Remember also that the reason OPR rates change is because of various economic factors.
What it all means is that many complex factors impact your property decision, from when to buy to how to finance your purchase.
Pros And Cons Of Falling OPR
Everyone loves a simple roundup of complicated situations, so let’s give you something to chew on!
Lower OPR rates can lead to lower variable home loan interest rates
Changing rates mean changing economic conditions that also impact property markets
Lower OPR rate can lead to lower fixed rate interest rates
It takes a long time for fixed rate home loan rates to adjust
Lower OPR means banks are less cautious about lending
Every other item of necessity can still cost a lot of money
If in doubt, speak to the home loan advisors at your bank, or contract the services of a qualified and licensed independent financial advisor who can help guide you through your financial planning needs.
When it comes to purchasing property, the more you know, the better equipped you are to find the right deal for you!