Earlier in August this year, Bank Negara Malaysia (BNM) announced the release of the Revised Reference Rate Framework, which will be effective August 1, 2022. Under this new framework, the Standardised Base Rate (SBR) will be used as the reference rate for new retail floating-rate loans, replacing the existing Base Rate (BR).
What is the Standardised Base Rate?
First, it helps to understand how your loan’s interest rates work. Refer to the image below.
Currently, the reference rate is the Base Rate which was introduced in 2015 and was to replace another reference rate, the Base Lending Rate (BLR).
Under the existing reference rate framework, each bank is allowed to set its own BR. This means that every bank has a different BR. The BR is internally determined by banks, based on the benchmark cost of funds and the Statutory Reserve Requirement (SRR). Basically, it doesn’t help us consumers that much that each bank has a different methods for calculating its BR.
So, going back to the Standardised Base Rate. It is basically a new reference rate that banks will use for certain loans, starting from August 1, 2022.
The SBR will be linked to the Overnight Policy Rate. This is the interest rate at which banks lend to one another, and it’s set by BNM. The SBR will follow the OPR – for example, if the OPR increases by 0.25%, the SBR will increase by 0.25% too. If the SBR increases, your loan instalments will increase as well. Conversely, if it decreases, your loan installments decrease too.
Currently, the OPR is at an all-time low of 1.75%.
When the new framework kicks in, however, the banks will all use a single rate – the SBR. The SBR will be the same for each bank.
What loans does the Standardised Base Rate apply to?
The SBR applies to new retail floating-rate loans, refinanced existing retail loans, and the renewal of revolving retail loans. Retail loans refer to loans given out to individuals (e.g. not businesses), while floating-rate loans refer to loans where the interest rate can change throughout the loan’s tenure.
How does this affect your existing and future loans?
Here’s how the new framework will affect your loans:
- Existing loans – loans taken before August 1, 2022 will still be priced against the BR or BLR. From August 1, 2022, the reference rates (BR or BLR) move in tandem with the OPR. This means that if the OPR increases or decreases by 0.50%, the BR or BLR will increase or decrease by 0.50% too.
- Future loans – loans taken from August 1, 2022 will be priced against the SBR. The SBR also moves in tandem with the OPR.
That’s why the move to the SBR makes lending rates more transparent. By setting a single reference rate that is driven only by the OPR, it helps consumers like us understand the changes in our loan repayments when interest rates change.
With a single reference rate, you can also compare lending rates across banks without accounting for different BRs. This makes it easy to see which banks are charging lower spreads.