Dealing with a bank or nonbank lender is often very nerve-wracking. It can be quite stressful to have to ask for incredible amounts of money, and this is especially true if you’re trying to secure a mortgage. The sums of money are often incredibly high, and they can be difficult to visualise. Moreover, the banking system itself can be very confusing. Sometimes, it feels as if banks create an entire separate language full of strange phrases and acronyms just to keep you in the dark. When they throw numbers and acronyms at you, it’s easy to get confused. The most important number you need, though, is your mortgage rate. You need to know the rate at which you will have to pay back your loan. A high rate could help you pay it off faster, but if you can’t afford it, you’ll be foreclosed on. Many banks are now using base rate mortgaging to determine how much someone will pay. It is more predictable and stable than older systems.
The Older Systems
Prior to the systems that were put in place recently, banks would make it very difficult for you to get best-rate housing loans in Malaysia. Many banks relied on something called the benchmark prime lending rate. This was mostly a lending rate that was arbitrarily chosen by individual banks. They would pick some number that they felt was the rate prime borrowers should pay. That rate could change, it was sometimes opaque, and it differed from bank to bank. This injected a lot of uncertainty into the system and afforded many opportunities for banks to cheat customers.
The New System
The new system of setting rates is known as base rate lending. Base rate refers to a formula more than an actual rate. Base rate is calculated by considering the operating costs of the bank, the cost of drafts on bank funds, deposit costs, and the desired profit margin. When you go to a bank that uses base rate practices, you’ll be able to figure out how much you will have to pay. You’ll also be able to better anticipate how much it is going to cost you soon. Here is why.
The operating costs of a bank don’t change very rapidly, and when they do change, they change predictably. Operating costs include the costs of paying employees, costs associated with an online presence, building fees, taxes, and utilities, and a few more costs that are considered overhead. These tend to stay pretty regular. The price of utilities will fluctuate depending on how much the heater or air conditioner runs each month, but they won’t be large changes when spread out to different customers. The same is true of employee costs and taxes. The other costs associated with running a bank are pretty static as well. The costs of deposits and drafts doesn’t tend to change from month to month. The biggest change will be in regards to the profit margin–that’s also where you stand to save the most money.
Since the profit margin is static, as the bank does better, it won’t have to charge you as much for your loan to make the same amount of profit.