Last updated 7th July 2020
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 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 we did 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?
In 2020, BNM made the announcement for the FOURTH time that they would cut the OPR rate:
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%
The current OPR rate "complements other monetary, financial, and fiscal measures to cushion the economic impact on businesses and households, and support the improvement in economic activity", according to their official statement.
While domestic growth is supposed to be better for 2020, international uncertainty continues to underpin a cautious outlook. This monetary policy thing sure is complicated! We're glad BNM have got it covered.
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 Overnight Policy Rate Impact Home Loans And Lending?
When the OPR goes down, the interest rates on loans decrease. That benefits 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 detail of the BR and BLR itself, it’s important to understand that a reduction in the OPR leads to a reduction in the BR and BLR set by banks.
That means the recent changes by BNM to the OPR are already having a knock-on effect on interest rates charged on variable home loans. But don’t worry, not all monetary policy is designed to make things more expensive!
The recent reduction in the OPR actually means that for buyers or people looking to access new home loans, they're able to enter into an initial agreement at a lower interest rate. Three cheers for BNM Malaysia!
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.
So Is The Falling OPR Rate Good For Buying A Home?
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 are falling is because of a slowing economic outlook.
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 Overnight Policy Rate
Everyone loves a simple roundup of complicated situations, so let’s give you something to chew on!
Pro: Lower OPR rates can lead to lower variable home loan interest rates
Con: Changing rates mean changing economic conditions that also impact property markets
Pro: Lower OPR rate can lead to lower fixed rate interest rates
Con: It takes a long time for fixed rate home loan rates to adjust
Pro: Lower OPR means banks are less cautious about lending
Con: Rihanna tickets 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!
If you'd like to know more about how OPR changes might impact your choice on buying a home, then read this guide. It explains more in-depth about how it can affect the property market, and what other factors to take into consideration as well.