Understanding OPR and Its Impact on Home Loan Rates in Malaysia

If you're considering buying your first home, you may feel overwhelmed by all the technical jargon associated with home loans. One of the most common terms you'll hear is OPR, or Overnight Policy Rate.

But what is OPR, and how does it affect home loan rates in Malaysia? Let’s break it down.

A quick overview of OPR

OPR is the overnight interest rate set by Bank Negara Malaysia (BNM). This interest rate is the rate at which commercial banks borrow or lend money to each other overnight.

Now, you might be wondering why banks need to lend money to each other overnight. Let’s first understand what overnight lending is and why this tool is important for the economy.

What overnight lending is

Overnight lending refers to the common practice in the banking industry of borrowing and lending money to each other for a very short period, typically for one night. This practice helps to ensure that banks have enough money to:

How OPR is used as a tool to regulate the economy

Overnight lending between banks has many benefits, but it can also destabilise the financial system if left unchecked. The interest rates at which banks lend to each other overnight affect broader interest rates in the economy, which can have ripple effects throughout the economy.

To reduce this risk, BNM sets the Overnight Policy Rate (OPR), which is the rate at which banks must lend to each other overnight. The OPR helps to smooth out and regulate interest rates, preventing them from fluctuating too wildly for consumers and businesses. Thus, the OPR is a key tool for BNM to manage the country's economy.

How OPR affects home loan rates in Malaysia

When BNM increases the OPR, it signals that it wants to reduce the amount of money in circulation and control inflation.

As a result, banks will increase the interest rate they charge on loans, which is known as their Standardised Base Rate (SBR). This, in turn, will increase the monthly instalments of home loans.

Conversely, when BNM decreases the OPR, it signals that it wants to stimulate economic growth by increasing the amount of money and loans in circulation. In turn, banks will lower their SBR. This will lower the monthly instalments of home loans or reduce the repayment period to encourage more takeup for loans.

It is important to note that only variable interest rates will be affected by any changes in the OPR, while fixed interest rate loans remain unaffected. Loans with variable interest rates tend to offer lower interest rates but have the risk of fluctuating. Loans with fixed interest rates tend to have higher interest rates but with the guarantee of stability.

How OPR can affect the approval of your home loan application

Fluctuating OPR doesn’t just affect home loan rates in Malaysia, it can also affect the entire home loan process. Here’s how.

When OPR rates are high, banks may also tighten their lending criteria, requiring a higher down payment, a better credit score, or a lower debt-to-income ratio. These factors make it harder to approve a home loan application.

However, when the OPR drops and banks lower their SBR, it becomes cheaper to borrow money and easier to secure home financing. In tandem, banks may also increase the maximum loan amount they are willing to lend to borrowers, making it easier to finance the purchase of a more expensive home.

Taking advantage of lower OPR

If you are considering a variable interest rate home loan, it is important to be aware of the current OPR rates, its trends and how the highs and lows will affect your home loan instalment amount.

If you prefer opting for a fixed interest rate home loan, it's best to apply when OPR is lower than usual or before it is expected to go up to avoid higher instalments.

Calculate your monthly home loan instalments at the current OPR with our easy-to-use home affordability calculator. Save yourself time and hassle by letting us do the maths for you! If you are satisfied with the terms, you can apply online immediately for a hassle-free experience.

💡 The information provided above is purely for educational purposes.