Myth Buster

Scenario

Felix is planning to buy a house and he wishes to find an ideal home loan to finance his purchase. Felix has read in the newspaper that the Base Lending Rate (“BLR”) is now replaced by the Base Rate (“BR”) as the new reference rate for loans. Felix’s sister, Loraine suggests that he should pick a bank that offers the lowest BR for minimum loan interest payment. Is that true?

Mythbusted.

The new interest rate comprises of two components, namely BR and the “spread”. The Bank’s assessment on borrower credit risk, liquidity risk premium, operating costs and profit margins will be indicated in the “spread”. Whereas BR is determined by Bank’s benchmark cost of funds in accordance with Statutory Reserve Requirement (SRR).

In other words, the effective lending rate shall be the total of BR and the spread set by each Bank.
For example, if Felix wish to take Maybank financing, the latest base rate as of 2 January 2015 for Maybank is 3.20% with “spread”, say it’s 1.25%. Thus, the effective lending rate to be paid by Felix is 4.45%. In short, Felix should compare the total of BR and “spread” offered by different banks in order to get a loan with lowest interest payment.

So, how much did you know about this Legal Myth?

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