Interest Rate Cut: How Does It Impact You?

The Central Bank of Malaysia cut its interest rates by 75 basis point from 3.25% to 2.5%. The latest move is higher than the consensus expectation of 50 basis point. The higher than expected rate cut probably reflects a faster than expected deterioration in the country's economy.

In the same token, the Central Bank has also reduced the Statutory Reserve Requirement (SRR) of banks by 150 basis points, from 3.5% to 2%. This potentially neutralizes the expected margin squeeze on banks (due to lower rates) by reducing banks' cost of funds, expanding liquidity in the banking sector and thus increases the capability of banks to restructure loan defaults and helps reduce risk of non-performing loans.

With the latest low interest rates, it's a blessing to loan borrowers but a bane to depositors. For loan borrowers, it is a good time to refinance their existing loans. A low interest rate environment will most likely bring some relief to the property market too.

On the other hand, the lower interest rate should benefit bond yield.

With the slowing economy (and possibility of recession) and volatile investment climate, it is indeed imposing greater challenges to sustaining real wealth creation in the foreseeable future.

Protect Growth To Avoid Recession

In line with global interest rate trend, Malaysia's central bank cut its key overnight policy rate (OPR) by 25 basis points to 3.25% at its final rate-setting for the year on Monday as a preemptive measure to avoid a severe economic downturn due to the global economic slowdown and credit crunch. This is also to ensure that domestic demand does not decelerate too quickly.

The central bank said the ceiling and floor rates for the OPR are correspondingly reduced to 3.50% and 3.00% respectively, and reduced Statutory Reserve Requirement to 3.5% from 4.0%, with effect from December 1st, 2008. Lowering statutory reserve requirement will lower cost of funds for banks, thus increases liquidity for lending. The rate change is the first since April 2006.

The Central Bank also hinted that there may be more rates reduction going forward, depending upon the state of the economy, particularly in 2009.

Although inflation for the month October was reported to be 7.6%, inflation is expected to come off sharply moving forward. As such, greater focus will be spent on protecting economic growth instead of fighting inflation.

Good news for both consumers and businesses as loan rates are expected to fall!

Should You Gear Up or Pay Up?

One common question i always received, is "Shall I gear up on my loan or pay up the loan as fast as possible"? The answer depends. Confused? Well, there is really no real right or wrong answer here.... The answer lies with the risk tolerance of an individual and to a certain extent, age too.

First of all, let's break this down into different categories...For those who are in the 20s and 30s, it probably makes sense to take on a greater risk by gearing up, that is, leverage through loans with longer tenure, with the assumption that you have a regular income and/or reasonable amount of savings, investments or businesses that are able to generate some consistent decent returns. These group of people generally can afford to take on more risks and in the worst case scenario, they have something to fall back on.

On the other hand, people who are more than 40s and approaching retirement age may consider taking on lesser risk. Bear in mind that the maximum lending age is generally up to 65 years old. Basically one should make sure that one is able to continue servicing the loan post retirement. Another reason why i like properties such as high-rise apartments or commercial properties that are able to generate positive cash flows. In essence, the monthly rental is more than able to pay off the loan installments so you don't need to worry about it too much!

Overall, you should review your own financial goals, resources (such as savings, investments and other diversifications) and risk appetite in order to come to any conclusion. eg., if you settle your loan first, you may lose out on other investment opportunities that may potentially give you much higher returns than your loan rates. On the other hand, if investment is not your cup of tea or if you have limited knowledge, then early settlement may be the better choice since it is a sure gain. Also bear in mind that all investments come with risk, so you need to be able to bear the risk if your investment decisions turn sour!

Other things to consider include the economy and the likely interest rate direction. Currently i would consider a good time to borrow since the banks are offering very attractive rates to the extent of BLR (Bank Lending Rates) minus 2, which works out to be around 4.75% (assuming BLR = 6.75%). However, in lieu of the current high inflation, banks may raise interest rates going forward. So, you could risk paying more interests in the future! However, i believe the rise should be negligible since the current inflation is cost driven rather than demand.

Another important element is from a tax perspective, it may not be advisable to settle early since there are certain tax benefits that come with investment property such as tax deductibility on loan interests against rental income. Effectively you will be paying less tax on your rental income. If you have two loans for your home and investment respectively, settle the home loan first.

Last but not least, if you have credit card debts (balance transfer and installment plan not included), you may consider refinancing your current property so that you could use the excess funds to pay off the outstanding credit card debts! Like I always said, never ever borrow money through credit card!

Do share with me your thoughts.

JG8D69D

How To Deal With Inflation?

With the recent whopping petrol price hike and rising cost of living, here are 18 ideas to tackle inflation and stretch your dollar to the limit...

1. Budget and Plan for your shopping and prepare a shopping list - keep to your budget and do not spend unnecessarily;
2. Monitor prices of shopping list among different locations and opt for the least expensive pricing;
   
3. Buy in bulk or bigger quantities - generally comes with bigger savings. However, make sure there is no wastage;
4. Buy generic or household brands - they are generally cheaper due to savings passed on to consumers due to zero advertising;
5. Buy local goods instead of imported goods, unless it's absolutely necessary due to for instance, better feature and/or safety;
   
6. Time your purchase during special promotion period - this is particularly applicable for non-essential items such as clothing and electrical;
7. Less dining outside and more dining inside - cook at home will save you money from dining at fancy restaurants;
8. Look out for loyalty programs and earn reward points while shopping - save on loyalty programs (such as petrol card where certain amount of rebates given in return for petrol pumped) and convert the reward points to free merchandising;
9. When dining out, try avoiding places which charge additional service charges and/or taxes;
10. Pick lunch over dinner when dining out is necessary - lunch time typically offers better set-lunch prices;
11. Plan your journey, especially when involving multiple locations - save on making duplicate trips and better planned journey;
12. Choose a nearer local holiday destinations where driving a car is necessary;
13. Choose an appropriate mobile phone call package that suits your lifestyle. eg., prepaid vs postpaid;
14. Consider to switch or replace your car with a fuel-economy vehicle;
15. Consider on-line banking and online utility payment - save on petrol and time;
16. Cut down on utility consumption such as gas, electricity and water;
    
17. Refinance your real estate property - take advantage of lower interest rates of repayment. For the more savvy investors or business people, the surplus cash (from refinancing) can be applied to investments with better return and/or working capital. Caution - this is only for people with the right discipline!
18. Choose wisely - Go for better alternative credit card debt instruments such as Balance Transfer and/or personal loan which carries a much lower interests. Do not go for the normal credit card debt that charges as much as 18% p.a.!
19. Make you money grow faster than inflation! There's no better than Save and Invest!
    

Do you have other ideas to tackle inflation?