BI’s benchmark interest rate continues to rise, what is the fate of the mortgage payments?

JAKARTA, KOMPAS.com – Bank Indonesia (BI) raised its benchmark interest rate (BI 7-Day Reverse Repo Rate/BI7DRR) four times with a total increase of 175 basis points to 5.25% for all of 2022. This will surely increase the bank credit interest rates such as home loans (mortgage).

Bank Permata’s chief economist Josua Pardede said the increase in the BI’s key interest rate would not be followed only by an increase in bank lending rates.

If you look at history, during the taper tantrum in 2013, the increase in the BI benchmark interest rate was immediately followed by an increase in bank lending rates.

Read also: Interest rate transmission

However, in 2018 and 2019, banks responded to the increase in the BI benchmark interest rate by lowering lending rates. He said this happened because bank liquidity was still safe and the level of risk accepted by the banks was quite good.

“We cannot draw conclusions that every increase in the BI interest rate will raise bank interest rates. So it depends on the bank’s liquidity and risk appetite, to what extent the liquidity is safe and the risk appetite is good enough , adjustments can take quite a long time,” he told reporters at Thamrin Building in BI, Jakarta on Monday (5/12/2022).

Under current conditions, he estimates that banks still need time to adjust to BI interest rate hikes that are quite aggressive this year.

Sooner or later a bank adjusts the BI’s reference rate to mortgage interest, depending on each bank’s liquidity situation. So if the bank has good liquidity, the pass-through increases mortgage interest it could be longer and the hint isn’t as big as the BI interest rate hike.

Seeing this, he estimates that the impact of the BI interest rate hike will only pass through to banks in the next 2-3 quarters or Q2 2023.

“Not just mortgages, but all transmission credits have a lag. If current bank liquidity conditions are still very loose, broad, we see transmission taking time,” he said.

Read also: How to calculate mortgage payments made easy with the Karls Mortgage Calculator

In addition, the impact of BI’s benchmark interest rate increase will not affect existing mortgage holders who are still in the fixed rate period. This means that an increase in the benchmark interest rate will only affect people who are repaying adjustable rate mortgages.

For your information, when someone takes out a mortgage, usually the first few years are still in a fixed interest rate period and then they enter a variable interest rate period.

“So we also have to pay attention to the impact on KPR, it doesn’t apply to existing ones. Usually it’s still the first 2 years fixed rate this will not affect people who have taken out their mortgage and are still in the period fixation rate,” he said.

Read also: In the past, many mortgage applications were rejected because of credit cards, now because of loan debt

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