Altered landscape

Late last year, banks reportedly agreed to end a fierce mortgage price war so that they could protect their profit margin. Aside from the removal of zero-moving cost, many banks revised their mortgage rates upward to around BLR -1.8% to BLR -1.9%, up from BLR -2.3% or even BLR -2.4%.

Lately, however, banks have been offering a more competitive BLR spread. On an online property forum, a mortgage representative from a foreign bank is offering BLR -2.10% throughout the whole tenure for home loans above RM200,000, and BLR -2.3% for loans above RM300,000. Another representative from a rival bank offers BLR -2.2% throughout the whole tenure for home loans of more than RM100,000.

Adrian Un, sales director at Mortgage Broker Sdn Bhd, said this development started two to three months ago, stemming from the rise in the overnight policy rate (OPR) and subsequent hike in BLR. “The rise in OPR gives most banks a breather in terms of interest margin. Previously, the banks were struggling with their profit margin,” he said. At a record-low of BLR 5.55% in 2009, an interest rate of BLR -2.2% meant the effective interest rate was 3.35% per annum. In contrast, with the current BLR 6.3%, an interest spread of BLR -2.2% means the effective interest rate is higher at 4.1% per annum. The average cost of funds for banks is reported to be about 2%.

J H Lok, who owns an upcoming mortgage and property web portal, agreed with Un. “I won’t be surprised if we go back to a lower mortgage rate when the BLR creeps up,” he said. “From the banks’ point of view, if they offer BLR -2.2% or BLR -2.3% without giving free moving cost now, they are still better off than before, when they had to offer zero-moving cost as part of the package,” he added.

The supply and demand model has also played an important role in altering the landscape. According to Un, a few foreign banks were still offering BLR -2% or lower when most local banks were adopting the “cartel” rate of BLR -1.9%. “But, realising that their market share was eroding, most of the banks are now playing catch-up to secure more business in the mortgage industry.”

Lok concurred. “The so-called ‘standardisation of rates’ is just a consensus among banks. This is not a set of guidelines governed by Bank Negara Malaysia. There is a demand for certain types of products at certain prices, and if there’s a willing bank that gives a competitive rate and still makes money, other banks can also offer better interest rates.”

This article appeared in The Edge Financial Daily, August 26 2010.