OPR (Overnight Policy Rate) is a popular term popping up in the news every now and then, especially in the past 2 years. It is a way for the government to regulate financial institutions and ensure they have sufficient cash supply to lend to their consumers. But how does this affect YOU

This guide is an expose on what happens when OPR increases or decreases and how it can affect your home buying decision.

What is an OPR?

OPR is the Overnight Interest rate set by the central bank, Bank Negara Malaysia (BNM). It plays a key role in ensuring a stable and liquid banking system.

The fundamental purpose of a bank is to lend money to consumers as much as possible without depleting the minimum cash reserve they need to maintain as required by BNM. But sometimes, they fall short of cash to lend to their borrowers.

When such circumstances arise, one bank can borrow money from another bank overnight. The rate at which the borrowing bank has to pay off its debts to the landing bank is OPR.

Why is OPR so important?

An OPR is the minimum interest rate at which a bank lends money to one another. It directly affects a bank’s base lending rate (BLR), base rate (BR) and base financing rate (BFR).

BLR is the interest rate at which conventional banks lend money to their consumers.

BFR is the rate in the context of Islamic retail financing facilities .

BR is the interest rate determined by the bank in deciding the interest rate to be imposed for housing loan borrowers since 2 January 2015.

When OPR increases, the cost of borrowing money from banks from one another increases. As a result, they increase the BR, BLR and BFR to compensate for the increased cost. Hence, the public has to pay more interest to take a loan. On the bright side, an increased interest rate means increased earnings from savings. So, people with fixed deposits or savings accounts enjoy a higher interest rate.

Similarly, if the OPR decreases, the banks reduce the BR, BLR and BFR. In turn, the public’s cost of borrowing decreases. But, in the hindsight, the interest from their savings is also reduced.

The recent OPR changes and why?

OPR has been in the news for the last two years for the heaviest fluctuation that Malaysia has ever seen. The onset of the pandemic in early 2020 hit the country pretty hard.

The Movement Control Order (MCO) placed by the government caused many businesses to close temporarily. Hence, they did not have enough revenue to keep up with their costs. This led to retrenchment, and many people lost their jobs.

People were emptying their savings accounts to fund their daily expenses. On the other hand, businesses and individuals struggled to pay their loan instalments and could not afford to take new loans. Government offered moratoriums to those who defaulted on loans, which led to less fluid cash in the market, putting financial institutions in a volatile position.

To rescue the economy from crashing and falling, the government intervened by cutting the OPR no less than 4 times in 2020, recording the lowest OPR in the history of Malaysia at 1.75%.

22 January 2020

On 22 January 2020, the government’s first pandemic ensued OPR cut began. It was reduced from 3% to 2.75% as a pre-emptive measure to improve global trade activity and sustain economic growth with price stability.

3 March 2020

The pandemic hit Malaysia harder than expected as productions were disrupted and travel activity was halted due to border restrictions. This led to tighter financial conditions, making financial institutions more volatile. Hence, on 3 March 2020, the government further reduced the OPR by 25 basis points to 2.5% to keep the economy floating to mitigate the economic impact of Covid-19.

5 May 2020

Since the last OPR cut, things have not improved. The global economy was contracting, leading to negative projected growth. The government slashed OPR by 50 basis points to 2%. It was intended to cushion the economic impact on businesses and households.

7 July 2020

Global economy continued to worsen, affecting the labour market. People were becoming more anxious as they were scraping the bottom of their savings. Businesses were shutting down as they could not afford to keep up their expenditure. So, on 7 July 2020, the government slashed the OPR by 25 base points to 1.75%. This was the lowest recorded OPR in Malaysian history. They hoped the reduced OPR would help stimulate the pace of economic recovery.

11 May 2022

Since July 2020, the OPR has remained consistent at 1.75%. However, recent global events were putting inflationary pressure on the country. The oil price shock hiked up international commodity prices and led to a strained supply chain, affecting the Malaysian market. To curb inflation, the government decided to increase the OPR by 25 base points to 2%.

The government says that apart from the inflation impact, the country is recovering well since the endemic transition on 1 April 2022. International borders have reopened, which has given rise to higher opportunities for foreign investment and tourism activity. Businesses are opening up, and people are returning to work leading to a reviving economy. So, the government believes increasing the OPR was the right move as the domestic growth is on a firmer footing.

What do OPR changes mean to homebuyers?

When the economy is thriving and people’s purchasing power increases, more and more people start spending, causing an oversupply of money in the system. To balance the supply and demand of money, the government intervenes and increases the OPR.

When OPR increases, borrowing money becomes expensive. It becomes more challenging to borrow money for both personal and commercial purposes. As a result, fewer people can afford to take a loan, hence their purchasing power decreases, directly affecting the housing market.

Homebuyers have to pay more interest on their home loan. As a result, their monthly loan instalments hike up. So, people with a constrained budget refrain from buying a home as they are afraid that they may not be able to pay for the loan at such an expensive rate.

On the other hand, when OPR decreases, the opposite happens. More people can borrow money at a cheaper rate. So, they are more inclined to buy a house as the interest rate is more affordable.

However, the impact on loan interest differs depending on what type of loan you take.

If your home loan has a variable loan interest, the effect will be almost immediate as the interest changes with the change in OPR.

However, if you have a fixed interest rate, you will be safeguarded from the immediate impact of the higher interest rate as it takes some time to adjust back to the current interest rate.

If you have knowledge of how interest rate works and can rightly predict that the future rates will work in your favour, a variable interest loan is suitable for you.

However, if you want to be on the safe side and avoid the immediate effect of fluctuating interest rates, then a fixed interest rate may be more favourable for you.

The statement and information in the articles are the opinion of the writer and meant only as a guide. Any property purchase, rental or lease involve many legal issues and other complication depending on the individual facts and circumstances. Readers and Users are strongly advised to seek professional advise including from qualified and competent lawyers, bankers and/or real estate agent to verify the information and the statement before embarking on any purchase, rent or lease of any property. To the fullest extent permitted by law, we exclude and disclaim liability for any losses and damages of whatever nature and howsoever cause and arising including without limitation, any direct, indirect, general, special, punitive, incidental or consequential.