07 October 2014

Is it Viable to opt for Fixed Rate Loan currently? (Oct 2014)

In anticipation of rising interest rate environment, would fixed-rate loans be a better option for borrowers? To recap, Bank Negara Malaysia, for the first time since 2011, raised the benchmark reference rate OPR to 3.25% in July 2014. While many anticipate that there will be another round of hiking soon, should loan borrowers opt for fixed rate loan?

What is Fixed-Rate loan?
By fixing your interest rate upfront, fixed rate loans protect borrowers from future increases in Base Lending Rate (BLR). In other word, the repayment amount will not be changed during the entire loan period.

Who is suitable for fixed rate loan?

Perhaps, if you are looking to avoid any volatility, in terms of interest rate movements, you may opt for fixed rate loan. However, it's not necessarily so in terms of paying lower interest rate. 

Why say so?
Normally, the interest rate on a fixed rate loan was set slightly above what you would be quoted for a floating rate. So, if the financial institutions expect rates to rise, they would quote higher fixed rates too !!! If you think you're clever, your banker also not stupid...

So, how to make decision?
To decide, one must know where are we today and how much more interest rates will rise. With the current BLR of 6.85% coupled with a discount of 2.4%, the net interest rate borrowers are serving now is 4.45%. As far as we know, the average fixed interest rate currently available is 5.00%, which is 55 basis points above current floating rate.

Based on historical OPR movements, there is just another 25 basis points to reach the pre-crisis level of 3.50%. Meaning, there is still another 30 basis points to go beyond the 3.50% OPR level before reaching the fixed interest rate. Since there is still a wide gap to reach the 5.00% level, it's not so attractive to take up fixed rate loan currently.

What do you think?


  1. Whether to get a flexi loan or not depends on the borrower type.

    Generally flexi loan has higher interest rate than term loan, but it is quite ideal for borrowers with variable income. Fixed rate is more suitable for borrowers who are afraid of fluctuation in repayments.


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