What Does an OPR Reduction Mean for Property Investors?
With all the socio-economic devastation that the corona virus is causing, the Malaysian government has initiated numerous policies to help ease the financial burden of the people, among them being another reduction in the OPR or Overnight Policy Rate – What does an OPR reduction mean for Property Investors?
First of all, what is OPR?
OPR is the interest rate that is set by Bank Negara on all lending that is done from one financial institution to another.
This rate is basically the lowest rate at which any lender is allowed to loan out funds and often referred to as the BLR or Base Lending Rate.
There is some confusion on the terminology here with the system being changed in 2015 whereby the BLR system has been replaced by BR or Base Rate System. You can read more about it here – https://www.imoney.my/articles/all-about-that-base-how-does-base-rate-work
For the simplicity of understanding of its effects however, there is no real difference of an adjustment of the OPR as it tends to almost always lead to a similar adjustment in the BR.
Bank Negara adjusts the OPR to either stimulate the economy or control inflation.
So, depending on what is needed by the country depending on the current economic situation, Bank Negara will react accordingly.
Increasing the OPR helps to minimize inflation and increase the value of the country’s currency in relation to other currencies (in effect making the ringgit stronger).
Decreasing the OPR helps to stimulate economic growth by making money more cheaply available through loans, encouraging people to invest and spend rather than save.
What does a reduction in OPR Mean?
What does this mean for us as Property Investors?
We are not financial institutions and we don’t lend money to them either. How does this affect us?
As borrowers, it means that the banks will effectively reduce our loan repayments for the period by which the lowered rates are in place.
Just how much?
Let’s take a look at what the rates in 2020 have been like so far.
As of this year, Bank Negara has reduced the OPR three times by 25 basis points each time.
The first time on January 22nd, the second time on March 3rd and the third time on May 5th. In effect this has been a total of 75 basis points or 0.75% bringing down the OPR to 2.0%.
Bank Negara has made a fourth reduction for the year of another 25 basis points on July 7th.
A 0.75% reduction in the OPR would equate to:
|Property Value (RM)||Decrease in Monthly Repayments (RM)||Overall Decrease Per Year (RM)|
*On the assumption of prior loan interest rate of 4.25% for 35 years at 90% financing.
As you can see this reduction is fairly significant and might actually make a lot of your negative cashflow properties now become positive cash flow properties.
Does it also mean that it’s a better time to buy property now?
In some ways, yes.
You’re going to pay significantly less interest on any property purchase that you make, and as rental rates have not come down, more properties will prove to be positive cashflow if they were not before.
This does not mean that you need to rush out and buy a property as we are likely going to be in a recession due to the impact of the corona virus and reduced interest rates should remain as they are or go even lower for as long as the economy does not recover.
Do note however, that these rates are subject to change depending on how well the economy is doing and just as quickly as the rates can be reduced, they can also be increased.
The last time Bank Negara raised the OPR was in January of 2018.
Besides a reduction in home loan repayments, this drop in OPR also has a few other consequences.
The most important being reduced Fixed Deposit rates.
Just when I thought there was no way the FD rates could get any lower…
There’s now even more incentive to look elsewhere for places to put your money.
You can take a look at the current FD rates in Malaysia here –https://ringgitplus.com/en/blog/fixed-deposits/best-fixed-deposit-accounts-in-malaysia.html and tell me how you feel about keeping your money there in the comments below.
FD is certainly not looking attractive, not that it has ever been – at least for the last 20 years anyway.
In my opinion, the OPR reduction is a good thing for most of us at the moment and is really only not great for any avid savers who have plenty of money stashed away in the bank.
It might be a good time then for savers to look at other financial instruments to park their money in.
It also may be an even better time to borrow money to start a business, despite the fact that the economic landscape is not fantastic.
But as I’ve said before, there’s always opportunities to be found. All we need to do is to look hard enough.