OPR: Is It Really Accommodating The Economy?

Going through another transitional period 

Those within the property industry can look forward to Q3 and Q4 this year with slightly more optimist with the reduction of Overnight Policy Rate (OPR) to 3.00%. The strict loan regulation coupled with poor Ringgit performance has seen buying power at its weakest. Bank Negara Malaysia’s move is projected to result in banks reducing their lending rates and making it cheaper for the masses and companies alike to obtain loans. According to Gary Chua from Smart Financing, this is certainly good news for the property industry. “I have predicted OPR to drop some where in Q3 to Q4 this year and it has materialised. In my opinion, this good move by the central bank is needed to accommodate the current economic situation of the nation to ensure that the economy continues to remain on steady growth part”.

BIGGEST QUESTION HOW DOES IT AFFECT YOU?

Banks reducing their base rates by 25 basis points will result in consumers having slightly more disposable income as the there is a reduction in interest payments. Now the public would have more cash on hand to spend. This move is largely implemented to stimulate the domestic economy, which so far has been lackluster.

As the banks now adjust their lending rates according to the OPR Changes, there will be a ripple effect on the floating rates, which are common for property mortgages. Gary further adds, we do not foresee this to have any impact to the new loan applicants reason being banks will adjust their spread accordingly to maintain the current ELR about 4.45-4.65% for residential loans. However, this is good news for existing homeowners who have taken up a loan earlier. Banks have adjusted their BR or BLR in tandem range from 14bps to 25bps.

RM600, 000.00 denotes the standard housing price for someone who is looking to settle down and start a family. Based on the 25 bps reduction will result in RM31,755.42 savings over a 30-year loan tenure. Borrowers will now have additional RM88.21 as their disposable cash. The reality of the situation means borrowers will now need to manage their finances accordingly because with more cash in hand, the likelihood of savings is somewhat low. Any reduction in the BR will decrease the repayment amount, actual repayment amount is still subjected to the loan tenure.

IS BORROWING EASIER?

Despite BNM reducing the OPR, banks are still under the mandate to scrutinize lending. Considering the national household debt-to-gross domestic product (GDP) ratio increased to 89.1% as of 2015 from 86.8%, borrowers will still have to face numerous challenges when applying for loans. According to Miichael Yeoh, the best method to overcome this problem is not to rush but to ensure all the documentations are ready so you minimize the chances of your loan application being rejected.

However, it is a good time for property buyers to examine banks offering better interest rates and to refinance loans though its subjugated on whether the existing loans are subject to a lock-in period. Kenanga Investment Bank Bhd equity research head Sarah Lim said in terms of monetary measures, Kenanga’s house view is that the Overnight Policy Rate (OPR) will remain for now and further cuts, if it happens, are unlikely to spur lending to the property sector. 

PROPERTY MARKET

Property demands has always been there, the mismatch of supply and demand coupled with the cooling measures introduced in 2013, poor Ringgit performance and implementation of the 6% Goods and Services Tax (GST) has significantly dampened the property market. According to Chee Kok Thim, Director of Valuation Services from Rahim&Co International “As a result of the slow down in the residential property market, developers are also delaying their launches and hence slowing down the construction activities.”

Because of the drop in OPR, the BR system may benefit borrowers, since the transparent reference provides them with better monetary options when it comes to selecting the plethora of loan offered by the various banks. Therefore, with lower monthly repayments and increased disposable cash, the number of borrowers receiving loans should increase.

WHERE DO WE GO FROM HERE?

Tan Sri Dato’ Dr. Lin See-Yan, Former Deputy Governor of Bank Negara Malaysia says we are currently facing ‘liquidity trap’ as an economist would deem it. While Esther Lai, Head of Sovereign Ratings, RAM Rating Services Berhad says any further cut in OPR is not in our expectation for this year. The way we look at it, in terms of supporting the economy, as we do not expect a huge credit growth.