How SOR, SORA, And SIBOR Rates Influence Home Loans In Singapore

Whether you visit financial institutions as an existing homeowner or a first-time buyer, you will often come across key benchmark terms like SIBOR, SOR, and SORA.

These acronyms determine the different bank loan types but with contrasting influences on how you will repay these loans.

While SIBOR and SOR have become inactive from 2021, it is always wise to understand how these benchmarks influence your home loan.

Swap Offer Rate (SOR)

Before the Monetary Authority of Singapore (MAS) introduced SORA, banks used to offer home loans either with SOR or SIBOR.

SOR or Swap Offer Rate pegged loans based on the USD or Singapore dollar exchange rates (automatic conversion).

Furthermore, banks used SOR to price bonds and commercial loans to corporate institutions with surrounding restrictions.

Since financial institutions determined SOR based on USD and SGD conversions, currency exchange fluctuations affected the market interest rates, which can escalate monthly repayments.

Singapore Interbank Offered Rate (SIBOR)

SIBOR worked as an alternative interest rate benchmark to SOR, which derives how different Singapore banks plan their average or future rates.

Currently, financial institutions use SIBOR to price corporate loans for enterprises, corporate or government bonds, and housing loans.

For instance, you can get a 1-month SIBOR, 3-month SIBOR, six-month SIBOR, or even a 12-month SIBOR on your housing loan.

Singapore Overnight Rate Average (SORA)

SORA also stated as the volume-weighted average rate is the rate at which financial institutions borrow transactions during a specific timeframe (8 am to 6:15 pm) in Singapore.

This timeframe is also known as the overnight interbank Singapore Dollar cash market (unsecured loans).

Although SIBOR-pegged loans offer more variety, after mid-2021, most Singapore banks opted for SORA-based loans to offer more transparency to the housing loan market.

In short, SOR & SIBOR transition to SORA has allowed financial institutions to offer better products to their customers.

Singapore banks employ three benchmarks (SIBOR, SOR, and SORA) to determine interest charges or payouts.

However, these interest rates can fluctuate daily, depending on which type of benchmark banks use for your loan.

The following table will help you understand the key differences between SIBOR, SOR, and SORA rates.

Although these three benchmarks play an integral role in determining the interest rates for loans, you can find some differences.

For instance, the Association of Banks in Singapore administers SIBOR and SOR benchmarks, while the Monetary Authority of Singapore manages SORA.

Likewise, the SOR benchmark concentrates on wholesale and commercial loans, while SIBOR and SORA focus primarily on home loans.

Furthermore, you can average out SIBOR-based home loans for longer durations, which means they will fluctuate after a specific timeframe.

For instance, you will have to pay an average SIBOR for 6 months if the interest rate of your home loan is pegged to a 6-month SIBOR.

In short, the SIBOR benchmark used in this case will fluctuate after every 6 months.

You can also use this formula to calculate a 12-month SIBOR, 1-month SIBOR, and 3-month or 3M SIBOR.

As mentioned earlier, the Singapore Interbank Offered Rate is a benchmark in interest rates used for lending purposes between banks.

The banking industry employs this interbank market to manage liquidity or to transfer currency or funds.

For instance, if a bank experiences withdrawal issues due to depletion of short-term cash reserves, that bank can borrow money at SIBOR or Singapore Interbank Offered Rate from the interbank market.

In short, you can also consider SIBOR as borrowers’ and lenders’ reference rates that participate in the interbank market.

Here are some key takeaways you need to understand while dealing with SIBOR.

•       SIBOR is one of the benchmark interest rates in Singapore.
•       The banking industry uses SIBOR for managing liquidity and transferring funds between banks in the interbank market.
•       Loan terms can vary overnight or sustain for some time, depending on the current trend.
•       Political stability, regulatory environment, and location can influence SIBOR.
•       The Association of Banks administers SIBOR for calculating the average.

·        You can consider SIBOR as the reference rate for borrowers and lenders.

The Swap Offer Rate or SOR is the process that financial institutions use to acquire better interest rates.

For instance, if a bank borrows USD and then converts it to Singapore Dollars using a foreign currency swap, SOR can help the bank to measure the cost of acquiring better interest rates.

However, SOR relies on the economy of the United States, which means it is more volatile and experiences currency exchange fluctuations.

Although banks do not offer SOR-pegged home loans after 2017, it is still evident in the wholesale and commercial sectors.

Here are some key takeaways you need to understand while dealing with SOR.

•       SOR is more volatile than SORA or SIBOR.
•       SOR can experience currency exchange fluctuations.
•       SOR-pegged home loans are not available after 2017.
•       SOR is one of the benchmark interest rates in Singapore.
•       You can still get SOR-pegged wholesale and commercial loans.

Singapore Overnight Rate Average is the latest benchmark for interest rates that offers more benefits than SIBOR and SOR benchmarks.

SORA considers actual bank transactions happening between a specific timeframe (8 am to 6:15 pm) in Singapore.

In short, you can consider SORA as a backward-looking benchmark for interest rates, making it different from SOR and SIBOR, which rely on future rates.

Here are some key takeaways you need to understand while dealing with SORA.

•       SORA is one of the benchmark interest rates in Singapore.
•       SORA considers a specific timeframe to calculate interest rates.
•       It uses a backward-looking formula (overnight transactions) to determine interest rates.

·        SORA is more transparent than SOR and SIBOR.

After its introduction in August 2019, SORA offered more transparency, and many financial institutions considered it more legitimate than SOR and SIBOR.

So the interbank market will pave the way for SORA, which will replace SIBOR and SOR in 2024 and 2021 to offer better interest rates.

The move to make SORA the ultimate benchmark by 2024 comes after multiple international institutions flagged LIBOR or the London Interbank Offered Rate.

Since SOR and SIBOR rates work on identical principles to LIBOR, they are prone to fraudulent manipulations, making products less legitimate for borrowers and lenders.

Furthermore, LIBOR’s reputation of earning multiple lawsuits and fines forced Singaporean authorities to define a new benchmark for the financial industry that offered more transparency.

As a result, the Monetary Authority of Singapore introduced SORA to offer better interest rates by calculating actual transactions.

After LIBOR disclosed how financial institutes could manipulate fraudulent transactions, interest, and deposit rates, the Monetary Authority of Singapore introduced Singapore Overnight Rate Average or SORA to offer better transparency.

The proposed shift of SIBOR to SORA by 2024 will benefit the Singaporean Dollar in the long run and will also improve financial markets.

Furthermore, SORA will strengthen the robustness and integrity of financial benchmarks, which was not possible with the other benchmarks.

But is SORA beneficial only for financial institutions and banks?

Although SORA will undoubtedly change the standards for financial institutions, customers will also benefit from SORA-pegged home loans.

Since SORA is more transparent towards pricing, it will clear market fragmentation and promote trouble-free loan assessments.

Furthermore, SORA will ensure an efficient financial market with deeper expansion, which will help customers to secure home loans without straining their monthly income.

Here are the benefits of securing a SORA-pegged home loan.

•       SORA’s backward-looking rates are more stable than SIBOR’s forward-looking rates.
•       You can work on a SORA-pegged home loan without consulting an expert or mortgage specialist.
•       SORA-pegged home loans are more sustainable than SIBOR options.
•       You can get SORA-pegged home loans in most banks in Singapore.

Although shifting to SORA might require some time, many Singaporean banks are offering SORA-pegged home loans to ease the transition.

For instance, the 3-month SORA rate (floating home loan) is one of the common options with a minimum rate.

Additionally, financial institutions are working to provide more sustainable SORA-pegged home loans with minimum loan requirements in the future.

1. Many major banks in Singapore offer SORA-pegged home loans, including OCBC, Standard Chartered, and DBS.

   These banks utilize the SORA benchmark to ensure that the interest rate refreshes after every three months.

   Furthermore, you can expect a consistent spread between 1.2% and 1.4% for most banks.

   However, banks like OCBC employ the 1-month SORA benchmark, which may induce monthly fluctuations.

   Likewise, some banks offer more competitive spreads (0.9%), which translates to the cheapest SORA packages in the financial industry.

   The following table will help you get a clear idea about SORA-pegged home loans in Singapore.

   Banks	OCBC	DBS	Standard Chartered	UOB	Maybank
   Rate Type	1-month compounded SORA	3-month compounded SORA	3-month compounded SORA	Three-month compounded SORA	3-month compounded SORA
   Rate (year 1)	1.20% per annum	1.20% per annum	1.20% per annum	1.20% per annum	0.90% per annum
   Rate (year 2)	1.30% per annum	1.20% per annum	1.30% per annum	1.30% per annum	0.90% per annum
   Rate (year 3 & after)	1.40% per annum	1.00% per annum	1.40% per annum	1.40% per annum	1.40% per annum
   Lock-in period	1 year	2 years	2 years	2 years	1 year
   Minimum loan amount	$300,000	$100,000	$100,000	$100,000	$300,000

    

   From this table, you can understand that most banks are switching their product lines to SORA to offer better transparency and efficiency.

   But what if you have a SOR-pegged or SIBOR-pegged loan package?

   Thankfully, existing SOR and SIBOR borrowers can use the SORA conversion package to convert their existing SOR or SIBOR loans to SORA-pegged loans.

   To do this, banks will apply an adjustment spread (retail on the actual loan margin) to switch your SOR package to SORA.

   Furthermore, you don’t have to pay additional charges to convert your package if your bank supports the SORA conversion package.

1. Unlike SOR loan packages that require some effort and attention, converting a SIBOR mortgage is more manageable.

   For instance, if you have an existing SIBOR package, you can use the SORA conversion package to convert your existing SIBOR loan to SORA.

   Furthermore, banks will automatically shift your existing SIBOR loan package to SORA after 2024.

Although both SORA and SIBOR work for home loans, they are very different from each other.

For instance, SORA works on backward-looking interbank transactions to compute the average rate for home loans.

On the other hand, SIBOR utilizes the forward-looking method to determine interest rates.

Furthermore, SORA is more sustainable and transparent than SIBOR, allowing users to determine the interest rate based on overnight results.

Meanwhile, SIBOR rates are volatile and unpredictable and often involve interest hikes.

Additionally, SORA interest rates are lower than SIBOR as it does not involve term and credit risk in the equation.