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TABLE OF CONTENTS
Who’s Controlling our House Loan Interest?
So you’re probably paying around 4% for your house loan, but ever wonder, who gets to decide how much interest you should be paying for your house and car?
Well, the short answer: it’s the banks, but there’s more.
Effective Lending Rate
The effective lending rate is the total rate a borrower pays on a loan. It is composed of two main components:
- Reference Rate: This is a benchmark interest rate set by the bank, often influenced by the central bank’s policy rates, in Malaysia, it’s the Overnight Policy Rate (OPR) that we concern.
- Spread: This is an additional rate that the bank adds to the reference rate, which reflects the bank’s costs and profit margin, as well as the risk profile of the borrower.
So, it’s Reference Rate + Spread = What You Pay.
Reference Rate
When it comes to house loans in Malaysia, the key reference rates you’ll hear about is the Standardised Base Rate (SBR). Here’s what you need to know about them:
- Influenced by BNM’s OPR: The Overnight Policy Rate (OPR), set by Bank Negara Malaysia (BNM), is the key to SBR. All banks will all use a standardised rate that is linked directly to the OPR’s movement, whenever OPR rises, so does the SBR! 📈
- Periodic Review: Reference rate is not meant to be the same forever; they are reviewed and adjusted time to time in line with changing economic and BNM’s policy updates.
Reference rates are floating rates: When these reference rates go up or down, the interest rate on your loan also adjusts accordingly, eventually the change in interest rates will reflect in your monthly repayment amounts.
Spread
The spread is an additional rate added on top of the reference rate, and it’s influenced by several factors:
- Credit Risk: If you’re considered a higher risk (like you have 10 credit cards that you never pay), the spread will likely be higher. They simply think you have higher chance of not paying back their loans!
- Loan Details: Things like how much you’re borrowing, for how long, and your credit history and ability to repay the loan all play a part in determining the spread.
- Bank’s Own Costs: Banks need to cover their operational expenses and make a profit, so these costs are factored into the spread. Bank is there to make a profit after all 💰!
- Market Competition: Banks also look at what their competitors are doing 👀 and may adjust their spreads to stay competitive!
And they are fixed rates: The spread rate remains constant throughout the loan tenure. No matter how the economy fluctuate, the spread is fixed throughout your repayment once you and the bank both agree on the rates.
Tips to Lowering your Loan Interest Rates
The reference rate is really not something within our control, so to get a loan with better interest rates, work on the lowering the spread instead!
- Improve Credit Score: A strong credit score can lead to a lower spread, so work on improving your CCRIS and CTOS today.
- Compare Different Banks: Shopping around for the best rates is always recommended! 🛍️
- Choose Shorter Loan Terms: If you’re willing to pay more every month, to bank you’re less risky! Loans with shorter durations often attract lower interest rates. Is it worth to choose a shorter loan terms, that’s story for another time!
Other than interest, what else is eating your disposable income? Tax! I’ve been wondering this for a long time – between average Malaysians and Singaporeans, who is paying more taxes? Do you have the same questions sometimes? Watch my video to find out!
Word of the Week: Tax-to-GDP ratio
Definition: The Tax-to-GDP ratio is a financial metric used to compare a country’s tax revenue to its Gross Domestic Product (GDP). This ratio illustrates how much a country’s government collects in taxes relative to the size of its economy. A higher ratio indicates a higher tax burden, meaning the government is collecting more taxes compared to the size of the economy.
The Tax-to-GDP ratio is important in analyzing the efficiency of tax collection and the extent of government intervention in the economy. A lower ratio could suggest a more business-friendly environment with lower taxes, while a higher ratio might imply more government involvement through public services funded by taxes.
- Minimum Threshold: A Tax-to-GDP ratio below 15% can be a concern. It may indicate that the government isn’t collecting enough taxes to fund essential infrastructure or social policies effectively.
- Maximum Ratio Considerations: There isn’t a strict upper limit, but very high Tax-to-GDP ratios might suggest a heavy tax burden that could hinder economic growth and investment. And unless the citizens have trust that the government will make well use of the funds, they might be unhappy with the policy, since higher tax = lower disposable income.
Tax-to-GDP ratios around the world:
- United States: 27.7%
- United Kingdom: 35.3%
- Germany: 39.3%
- Malaysia: 11.8%
- Japan: 34.1%
- Singapore: 15.5 %
- China: 12.3 %
Key Economic Dates:
- 13th December: PPI (Nov), Fed Interest Rate Decision, FOMC Press Conference
- 14th December: Initial Jobless Claims
- 15th December: S&P Global Services PMI (Dec)
What I’ve been reading:
Here are the top stories that caught my eye:
- Moody’s cuts China’s credit outlook to negative on rising debt risks
- Google admits they have edited Gemini AI demo video
- Tesla’s Cybertruck is here, more expensive than initial estimate
- Spotify lays off 17 percent of its workforce
- Some wisdoms from Charlie Munger, legend who died at age 99
You’re all caught up!
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Cheers,
Ziet
