It was announced recently that Bank Negara Malaysia has increased the overnight policy rate (OPR) by another 25 basis points, taking it to 2.25% following a jump to 2.00% in May from an historic low of 1.75%. But what does that mean for our wallets...and our car payments?
A statement released by the central bank said that the decision made by their Monetary Policy Committee “was made as Malaysia’s economic activity has continued to strengthen in recent months. This was signalled by exports and retail spending indicators, an improving employment market, as well as improving income prospects,”
“Amid the positive growth prospects for the Malaysian economy, the MPC decided to further adjust the degree of monetary accommodation. This is consistent with the MPC’s view that the unprecedented conditions that necessitated a historically low OPR have continued to recede.”
Because the OPR is known to have widespread financial and economic effects, the big question on our minds - being involved with Carlist.my - is whether it will impact our auto loans?
Apa Itu OPR?
In basic terms, OPR is referred to more commonly in the banking world as an overnight rate, used to regulate large banks that borrow/transfer money between one another to maintain balance and liquidity as, due to customer withdrawals and deposit activities, they experience a shortage or surplus of cash at the end of the day.
As OPR affects the base lending rate (BLR), fluctuations here will trickle into both macro and micro-level financial activities and transactions such as fixed deposit rate, foreign exchange rate, short-term interest rates, and long-term interest rates.
Lower OPR generally means lowered interest rates across the board as banks make the necessary adjustments, which can encourage consumer spending, borrowing activities (taking out loans, for example), and generally stimulate the economy.
Banks can theoretically absorb the increase in OPR since it will be charged only between financial institutions and is not directly presented to customers, but of course, that won’t happen.
A higher OPR, such as which we’ve just gone through, has the opposite effect and translates into higher interest rates due to the higher borrowing cost, but is also seen as a marker of economic optimism. This was used as some justification by Bank Negara in the earlier statement excerpt, which continues:
“The MPC will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth. Any adjustments to the monetary policy setting going forward will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.”
Impact On Hire Purchase Loans
Homeowners are the largest single group impacted by any change to OPR as housing loans are most commonly undertaken with a variable (floating) interest rate policy. There are various reasons for this, but are mainly due to: (1) housing loans are much longer-term and stretch multiple decades, (2) involve much larger sums of money, and (3) are appreciating assets.
Variable-rate housing loans tend to be more attractive to buyers due to the lower repayment initially, reducing the barrier of entry into home ownership The hope is either the individual's financial situation will improve in tandem with the higher repayments or that the property will appreciate enough to cover or exceed the balance owed to the bank.
The opposite applies to car loans (hire purchase), in which the majority of buyers choose fixed-rate financing due to it involving a much shorter-term (3-9 years) and a depreciating asset. A majority of variable rate hire purchase agreements are meant to appeal to first-time car buyers. Are you one of them?
Since fixed-rate loans are not charged on the outstanding balance based on an underlying benchmark or index, they are much less susceptible to these overnight rate (and BLR) fluctuations.
By the same coin, hire purchase agreements (the most common type of car loan) have their interest paid upfront in addition to the balance and downpayment. Ownership of the item/merchandise, therefore, is usually not granted to the buyer until all payments have been made.
However, as mentioned, some hire purchase agreements do use variable rate financing, which would mean that, before long, you would need to service a higher monthly instalment following an increase in OPR, which again impacts the base lending rate (BLR).
The shorter version is this: you can pretty much rest easy if your hire purchase agreement was based on fixed-rate financing.
However, if you chose variable-rate financing due to its more attractive (lower) initial repayments, you’ll very likely have to start paying more each month. Next time pay cash lah. Beli moto je. Senang!