Effective 2 January 2015, the Base Rate (“BR”) has replaced the Base Lending Rate (“BLR”) as the main reference rate for mortgages and loans.
The Base Rate is touted to be more transparent and allows customers to easily identify banks that are offering the best rates for loans. According to Bank Negara, the new reference rate will comprise two elements, which are the Base Rate and the “spread”.
The Base Rate is determined by banks’ cost of funds and will differ marginally from one bank to another. Typically, banks that are able to attract cheap long-term fixed deposits will be able to offer lower Base Rates as opposed to banks that depend on the more expensive inter-bank market for funding.
The “spread”, meanwhile, essentially comprises elements such as the bank’s overheads and the credit risk profile of borrowers. This effectively means that banks that are less efficient and incur high overheads will not be able to offer competitive rates.
However, the new framework will not bring about any changes in the cost of borrowing for consumers or impact the profitability of banks.
Before this, the BLR was the standard benchmark used by banks to determine the loan rates for consumers. The more efficient banks that enjoy a lower cost of funds offer rates as low as 2.4% below the BLR that is now pegged at an average rate of 6%.
However, it sometimes becomes difficult for customers to differentiate the rates between one bank and another because there is no breakdown in the cost of obtaining a loan.