Bank Negara Malaysia (BNM) announced another Overnight Rate Policy (OPR) cut, making it the fourth reduction for 2020 on 7th July 2020. As a Malaysian, how can this low interest affect you in the best way? Here are 6 savvy ways on how you can take advantage of this lower OPR.
If you’ve been following our local financial news closely, you’d probably have seen words like “OPR” and “cut interest rates” popping up in headlines. If you’re lost, we’ll fill you in.
Just recently, Bank Negara Malaysia (BNM) announced that they had cut the overnight policy rate (OPR) for the fourth time this year, now to a record low of 1.75% - the lowest since 2004. As a move to stimulate the economy in a COVID-19 world, OCBC Treasury Research economist Wellian Wiranto said to The Edge Markets that this is “a testament of just how unprecedented our current situation has been”.
If none of the above makes
cents sense, don’t worry - we’ll break it down for you.
What is Overnight Policy Rate (OPR) and why does it matter to you?
If any part of your life has anything at all to do with a bank, then yes - the OPR affects you.
If you’re a borrower, you’ll know that all your loans come with an interest rate. These rates are dependent on the Overnight Policy Rate (OPR) set by Bank Negara. If the OPR increases, so will interest rates. If the OPR decreases, so will interest rates.
Increasing or decreasing the OPR will immediately increase or decrease the cost of borrowing for banks, and thus, will lead to a chain effect… and therein lies the opportunity for consumers like you and me.
For borrowers, it’s a time to enjoy. One of the biggest benefits of a low interest is that debt servicing charges are lowered significantly, likewise with loan instalments with variable interest rate loans. Basically, this means that if you buy a big ticket purchase that requires financing help from the bank, you’ll get a much better rate when the OPR is low.
However, it’s not-so-good news for those who depend on the interest on their savings/current accounts and fixed deposits. With the lowered interest rate, the existing money in the bank will not grow like before (until the OPR increases).
(TL;DR) OPR rate drop = lower interest rates = cheaper loans that encourage you to borrow from banks, also lower ROI from existing money in banks (e.g. savings, FD)
Okay, so why did Bank Negara lower the OPR?
As you know, we’re one of the many countries impacted by the COVID-19 pandemic. With everyone holding back, a lower interest is designed to encourage the public to spend during these difficult times. By spending more, we'll stimulate the local economy and hopefully recover fast enough so that the country doesn’t go into a recession.
In a conversation with Focus Malaysia, Sunway University Business School economics Professor Dr Yeah Kim Leng said that now, consumer sentiment is weak and people and businesses tend to hold back more. When people hold themselves back from spending, money doesn’t move or grow.
With a lowered interest rate, people would be more likely to jump on the opportunity to borrow from banks to finance the things they need - investments, a new home, a new car, so on and so forth.
“So, from a consumer’s perspective, a rate cut makes things easier on our pockets. [...] Typically, a lower rate will encourage those who are creditworthy to use more debt for spending or investments.” - Professor Dr Yeah Kim Leng to Focus Malaysia
How to take advantage of low OPR rate in Malaysia
So now that we roughly know how the OPR affects and benefits us as consumers, what would some of the immediate ways we can use to take advantage of the low OPR? Let’s start with the most obvious:
1. Buy a home - or your second, third, fourth…
Thinking of buying a home, whether for yourself or as an investment? Now would be a great time to do so.
Unless you have cold, hard cash to pay off the cost of a new property, you’ll need to borrow from banks. As a lower OPR would cause local banks to adjust their lending base rate (BLR) and base financing rate (BFR) accordingly, now would be a great time to secure a better deal with the bank so you can maximise your spending or have more to save.
Just to add to that, Jin Ooi, a team leader in real estate at Kith & Kin, previously told us that he’s already seeing and expecting a 20% decline in property prices at most as the market shifts into a buyer’s market as a result of COVID-19.
Besides, the government has also thrown in incentives for budding homebuyers as part of their PENJANA stimulus package as we head into an economic recovery - stamp duty exemption being one of them.
With so many benefits coming in at once, it does feel like the right time to invest in a new home - considering you have the financial capabilities, of course. By the way, we’ve covered the topic of property buying tips in this New Normal previously - read it in full here.
2. Consider getting a vehicle (if you need one)
While the returns of getting a new vehicle is… well… nonexistent, you may want to consider financing a car for the same reasons we highlighted in the point above. With a lowered interest rate, you can secure yourself a better repayment deal with the bank.
This is great if you were already thinking of getting a new vehicle, but never really took the leap. However, if you’re thinking of getting one just for the sake of taking advantage of a lower interest rate, you may want to think twice. Unlike property, the value of vehicles depreciates the second you buy it, so you’ll never be able to make back what you put in.
3. Refinance your current loans
So, let’s say you don’t have any plans to buy a new home… can you use the OPR cut to help you with your current mortgage? In an article from iProperty, we learn that as an existing borrower, you’ll get to benefit from:
- Lower monthly instalment payments - banks would adjust their interest rates accordingly, but do give your bank a call to see if you’re eligible.
- A shorter loan period - provided you pay off the monthly sum as per usual (basically not paying less as per (a) above), you may have the option to clear off your debt faster than you.
However, you have to check with your bank and your loan type (floating or fixed interest rate). If your loan falls under the latter, you probably won’t see a change in your monthly instalment payments. But don’t be disheartened - you can still take advantage of the OPR by refinancing your home. Refinancing basically means to replace an existing loan with a new loan.
For context, most people choose to refinance because they struggle to pay off their mortgage. Let’s make an example of Ali, who pays RM4,000/month to the bank to pay for his Mont Kiara condo. When the Covid-19 pandemic hit, he lost his job. He’s been using his savings to pay off his commitments, but it’s been 3 months and his savings are running dry. He had to settle for a new but lesser-paying job, and he doesn’t want to lose his Mont Kiara condo. With his new budget, he can only afford to pay RM3,000/month.
Ali then visits his bank to discuss a refinancing solution. The bank works out a solution with him, and adjusts his loan according to his financial situation - perhaps extending his tenure by 10 years.
So, as for yourself, you can always speak to your bank to see how you can take advantage of the OPR cut to refinance your home with the new interest rate. By refinancing, you can also work out a schedule to clear your debt faster.
Just be aware that refinancing comes with some additional costs to cover the administrative work, so you’ll have to run some calculations to see if it's worth the value you're getting in return.
4. Remove money from your deposits to put into other higher interest investments
The money that you currently have in your bank - be it in your savings/current account, or in your fixed deposit - isn’t going to grow as much as it did when the OPR was higher. At this point, you can always consider taking them out and putting them into other higher-interest investments.
So, what kind of investments can you consider? In a recent article on the OPR cut, Fundsupermart research senior analyst, Jerry Lee Chee Yeong, told The Malaysian Reserve (TMR) that equities can generate higher returns albeit at a higher degree of risk.
“We always encourage our investors to adopt a portfolio approach for their investment. It is very important to have a well-diversified portfolio regardless of any market environment.
However, between bonds and equities, we like the latter. Bond yields have compressed significantly over the past one year, while the recent sell-off in global equity would have presented a good buying opportunity to investors.” - Fundsupermart research senior analyst, Jerry Lee Chee Yeong to TMR
Rakuten Trade research VP Vincent Lau shares the same ideals, adding that the tech-related sector is prime as our lives become more digital and 5G being at the center of it all. Real estate investment trusts (REITs) are also a considerable option, as the OPR cut is expected to see more movement in the property market. (To read more about what experts had to say, head over to the full article by TMR here.)
Just remember - there is no such thing as a 100% risk-free investment. Do your own research and gauge your own financial capability before you jump into anything, and consider diversifying your investment portfolio so that you can withstand the negative impacts that may or may not come in the future.
5. Speed up your debt repayment with a personal loan
If you have any outstanding high interest debt (like credit cards) that is beyond your control, you can actually consider taking up a personal loan to clear it off.
Just to be clear, while the OPR cut immediately affects mortgage and car loans, it may not be as straightforward when it comes to personal loans. While you’re still technically borrowing from the bank, restructuring the interest rates for personal loans require a lot of effort on their end. While some banks may reduce their rates, some may throw in incentives (e.g. cash rebates).
In any case, an OPR cut could make personal loans a little more attractive. It’s best to follow closely what banks would be offering so you don’t miss out. You can always start by browsing through some of the existing personal loans available here, or simply follow us on Facebook for updates.
Getting back to the idea of speeding up your debt repayment - although it may seem counterintuitive to take up a loan when you’re already riddled in debt, consider this first. Personal loans - even without the reduction of the OPR - have a much lower interest rate (approximately 7%, could be more or less) than credit cards (approximately 15%, can increase depending on the size of your credit card debt).
6. Kickstart or grow your business with a loan
It takes money to grow money. In this case, you need capital to start or grow your business.
Carrying on from our previous point about personal loans, you could take this time to reassess your business and see how a personal loan can help you make the necessary adjustments to further develop your offerings in this new normal.
You could also consider starting a whole new business, such as selling on e-commerce platforms or joining a franchise. Speaking of franchises, we have a list of 50 franchises - Tealive, Nelson’s, Boost Juice and more - which you can join in Malaysia ranging from RM15,000 to RM800,000. If you’re feeling itchy-handed, just read more about it here.
Whatever you do, ensure you are financially capable first
We’ve pretty much established that the low OPR is pretty good news to borrowers. But as with anything in life, the wisest thing you can do is to assess your situation first before you commit to anything new.
It’s also crucial that you weigh both ends of the scale, too. Capspring Temasik financial adviser Wong Lee Kheng told Focus Malaysia that people have to look at the value an investment creates against the incurring costs.
“The OPR cut is only an advantage if it has been part of the equation in your plan to buy a property or car from before the cut, otherwise you need to do your own research and speak to loan advisors to know more before jumping in.” - Capspring Temasik
financial adviser Wong Lee Kheng to Focus Malaysia
Last but not least, always remember that there is no such thing as a completely risk-free investment, so always do your own research or get help from a financial advisor to steer your finances in the right direction. Keep sufficient cash in your reserves, so you don’t have to struggle if things don’t go according to plan.