Rent buy guidelines are altering – flat price, Rule of 78 out; EIR, lowering steadiness methodology beginning subsequent 12 months

In September this 12 months, Financial institution Negara Malaysia issued a brand new coverage doc on private financing which outlined a sequence of measures geared toward selling prudent and accountable financing practices amongst monetary service suppliers (FSPs), whereas additionally guaranteeing shoppers are higher knowledgeable to encourage accountable borrowing behaviour.

Of specific curiosity on this doc are paragraphs 10.11 to 10.13, which prohibits FSPs from utilizing a flat price (also referred to as easy rate of interest) and/or Rule of 78 methodology to compute curiosity/revenue cost when providing private financing from January 1, 2027.

Later in October 8, 2025, the Dewan Rakyat handed the Rent Buy (Modification) Invoice 2025 which additionally abolishes the flat price and Rule of 78 methodology as soon as the amended Rent Buy Act is gazetted, which is anticipated in Q1 2026. As such, rent buy suppliers are given a grace interval of 18 months from the date the amended Act is gazetted to implement these measures.

It must be famous that the amended Rent Buy Act 1967 (HPA 1967) is ruled by the ministry of home commerce and prices of residing (KPDN), which works with BNM the place the latter regulates banks that provide rent buy merchandise.

To raised clarify how the modification will have an effect on rent buy loans transferring ahead, BNM not too long ago invited us to its ‘Fostering Fairer Conduct amongst Monetary Service Suppliers’ media workshop, and listed below are the important thing takeaways:

What’s it like now?

Once you take a rent buy mortgage, you’re usually proven the flat price which is used to calculate curiosity funds primarily based on the unique mortgage principal. For instance, if you happen to take up a nine-year mortgage for RM100,000 with a 3% flat price, your whole curiosity could be RM27,000 (RM100,000 x 3% x 9 years).

Including the entire curiosity payable to the principal quantity (RM100,000), you arrive at RM127,000, which is then divided by the variety of months (9 years = 108 months) to provide a month-to-month instalment quantity of RM1,176 (rounded for simpler understanding).

With every month-to-month instalment paid, the quantity is cut up to repay the curiosity and principal, which, within the easy curiosity methodology could be the identical all through the complete mortgage tenure. Nonetheless, this isn’t the case as rent buy suppliers don’t comply with this easy curiosity methodology.

As a substitute, rent buy suppliers use a technique known as the Rule of 78 which apportions extra of the curiosity earlier within the mortgage time period earlier than progressively lowering it in the direction of the tip. We’ve lined this matter earlier than.

The wanting it’s that the Rule of 78 isn’t beneficial to those that want to settle their mortgage early. It’s because with most of your instalment quantity being directed to repay the curiosity within the early interval of the mortgage, a great portion of the principal quantity nonetheless must be settled.

How do the amendments to the HPA 1967 assist shoppers?

Banks can not use a flat price to market their rent buy merchandise as soon as the 18 months grace interval ends. As a substitute, they have to present the efficient rate of interest, which higher displays the true value of borrowing by considering further charges, costs in addition to the amortisation schedule.

The system to get the efficient rate of interest is complicated, however working the numbers by a available on-line calculator, the EIR for the instance above is 5.5%. Whereas the flat price of three% appears engaging, it doesn’t replicate the precise value of borrowing as how EIR does.

If one rent buy supplier advertises a low flat price of three% however the ensuing EIR is 5.5%, and one other supplier advertises an EIR of 5%, you’ll undoubtedly pay much less curiosity with the latter. In easy phrases, EIR lets you higher evaluate numerous mortgage affords on an apple-to-apple foundation – decrease EIR, much less curiosity. Rent buy suppliers should disclose the EIR to clients, regardless in the event that they go for a hard and fast price or variable price rent buy as soon as the 18 months grace interval ends.

To go together with the EIR, the opposite massive change is using a lowering steadiness methodology to calculate curiosity/revenue. These with home loans will know precisely what this implies however for individuals who don’t, the quantity of curiosity payable will likely be calculated primarily based on the excellent principal and never following the Rule of 78.

That is advantageous for individuals who plan to settle their loans early, as there’ll not be anymore front-loading of curiosity within the early interval of the mortgage. Right here’s a direct comparability utilizing the identical 3% flat price and 5.5% EIR examples talked about above:

As you’ll be able to see, the lowering steadiness methodology ends in you paying much less curiosity because the mortgage progresses in comparison with the Rule of 78 methodology, the latter having a special system to calculate month-to-month curiosity.

It’s essential to notice that each strategies meet on the identical finish level if you happen to run the total mortgage tenure, which is you paying a complete of RM127,000 (principal plus curiosity) to the financial institution. Nonetheless, if you happen to determine to settle the mortgage early, you get pleasure from extra financial savings as the quantity of curiosity payable is diminished over time. There’s a “tipping level” the place the financial savings are maxed out and begin to scale back, which is across the three-year mark.

In accordance with BNM, this change is per international practices that has abolished the Rule of 78, comparable to in Australia, New Zealand and United Kingdom. With EIR higher reflecting the true value of borrowing, it is going to be simpler so that you can store for a rent buy mortgage. In the meantime, the tip of the Rule of 78 and adoption of the lowering steadiness methodology means you gained’t be “punished” as severely for desirous to settle your rent buy mortgage early.

Anything I ought to learn about?

Different essential issues that BNM highlighted is rent buy suppliers should open up to shoppers that the EIR is capped at 17% each year for loans with tenures as much as 5 years, and 16% each year for loans with tenures of greater than 5 years. Variable price rent buy loans have their EIR capped at 17% each year, as per present apply.

Moreover, the terminology has additionally been up to date, with ‘base lending price’ being changed with ‘reference price’. The reference price refers to BNM’s standardised base price (SBR) which follows the in a single day coverage price (OPR). That is a part of BNM’s revised reference price framework that got here into impact on August 1, 2022, however is now making its approach to rent buy loans.

Beforehand, banks will use funding prices and the statutory reserve requirement (SRR) value imposed by BNM because the benchmark to cite their base price. With the change, the SBR is similar for all banks, to which they add on the unfold (rate of interest a financial institution receives on a mortgage) for the efficient lending price (ELR).

Lastly, shoppers could have extra flexibility to go for digital or digital signatures and to obtain rent buy agreements and associated paperwork electronically. Put merely, the signing methodology isn’t restricted to you being there bodily, as you may as well signal a doc utilizing a digital or digital signature, type of like how insurance coverage brokers do with their iPads.

As protecting measures for shoppers that go for digital signatures, rent buy suppliers will likely be required to conduct verification on shoppers through the preliminary signing of the settlement. Paperwork may be delivered electronically along with the present strategies of hand supply and through registered publish.

BNM did present a number of FAQs that it obtained, considered one of them being whether or not shoppers ought to maintain off on shopping for automobiles till the amended Act comes into impact. The reply is not any, as a result of until you intend to settle earlier and intend to maximise curiosity financial savings, there’s not that massive of a distinction.

The central financial institution additionally mentioned that month-to-month instalments (as the instance exhibits) gained’t differ between techniques. The objective is to create a extra clear mortgage buying surroundings the place evaluating EIR is all shoppers must do as an alternative of getting to dig by the (often) difficult product disclosure sheet, which may confuse those that aren’t financially literate.

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