In this blog, we’ll explore the significance of this benchmark interest rate in simple terms, without any complicated jargon.
The SORA Rate, or Singapore Overnight Rate Average, reflects the average rate at which banks in Singapore lend and borrow SGD cash overnight.
Join us as we delve into the calculation methodology, the benefits of refinancing, and the comparison between SIBOR and SORA.
Key Takeaways
| Topic | Key Takeaway |
|---|---|
| SORA Rate | – SORA is the volume-weighted average rate of borrowing transactions in the interbank SGD cash market in Singapore. – It is a benchmark interest rate used in SGD-denominated financial products. |
| SORA Rate Calculation Methodology | – SORA rate is calculated using eligible transactions in the interbank SGD cash market. – Volume-weighted average rate of borrowing (VWOB) is the key calculation. |
| Benefits of Refinancing with SORA | – Refinancing with SORA can offer increased flexibility, transparency, and potentially lower interest rates. – SORA-based loans allow customized monthly installments and lower borrowing costs. |
| Risks of Refinancing with SORA | – The main risk is the potential interest rate increase over time, leading to higher monthly installments. – SORA is relatively new and untested compared to other benchmark rates like SIBOR. |
| SORA as a Benchmark Interest Rate | – Benchmark interest rate used to price financial products in SGD. – SORA reflects the borrowing costs of financial institutions in the interbank SGD cash market. – Growing acceptance in Singapore. |
| SIBOR vs. SORA | – SIBOR is based on surveys, while SORA is based on actual transactions. – SORA is transparent and reliable, while SIBOR is forward-looking. – Choice depends on the borrower’s preferences and risk appetite. |
| Impact of 3-Month Compounded SORA | – 3-Month Compounded SORA affects borrowing rates for loans based on this benchmark rate. – Advantage: reflects actual borrowing costs and transparency. |
| SORA Rate and Loan Packages in Singapore | – SORA rate is used as a benchmark for loan packages in Singapore. – SORA is more accurate and transparent compared to SIBOR. – SORA rate calculated and published by MAS and ABS. |
| Transition from SIBOR to SORA | – Shift from SIBOR to SORA due to possible discontinuation of SIBOR. – Borrowers may experience changes in loan rates and have options for loan servicing. – Impact on historical loan rates and repayments. |
| Historical Performance of SORA Rate | – SORA rate has tracked a narrow range over the past year but is subject to fluctuations. – Factors influencing fluctuations include supply and demand for SGD liquidity and market expectations. |
| 1-Month vs. 3-Month Compounded SORA | – 1-Month and 3-Month compounded SORA differ in the period used to calculate the rate. – Choice impacts the responsiveness of loan interest rates. – Consider risk appetite and interest rate expectations. |
| Importance of SORA as a Reference Rate | – SORA is used as a reference rate for cash market and investment products. – Transparent benchmark rate published by MAS and ABS. – Influences inflation rates and other key interest rate benchmarks. |
| SORA Rate and Mortgage Rates in Singapore | – Mortgage rates in Singapore are affected by changes in the SORA rate. – SORA-pegged home loans have floating rates. – Higher SORA rate leads to higher interest rates on loans and vice versa. |
Introduction to SORA Rate and Its Significance
What is SORA Rate?
SORA is the volume-weighted average rate of borrowing transactions occurring within the interbank SGD cash market in Singapore over a period of time.
In other words, it is a benchmark interest rate that reflects the average rate at which financial institutions, such as banks in Singapore, lend and borrow SGD cash overnight.
What is the Significance of SORA Rate?
SORA is an important benchmark interest rate because it serves as a pricing basis for a plethora of SGD-denominated financial products in Singapore.
SORA-based loans and derivatives are increasingly being used by financial institutions to manage their exposure to SGD interest rate risks and by businesses to hedge against fluctuations in interest rates.
How is SORA Rate Determined?
The MAS determines the SORA rate by computing the volume-weighted average rate of borrowing transactions executed between 9:00 a.m. and 6:15 p.m. on each business day.
This rate is published on the MAS website by 9:00 a.m. on the following business day.
Understanding the SORA Rate Calculation Methodology
How is SORA Rate Calculated?
The SORA rate is calculated using eligible transactions that actually take place in the interbank SGD cash market, subject to certain conditions.
These transactions are screened for any anomalies before being included in the computation of the benchmark.
What is Volume-Weighted Average Rate of
Borrowing (VWOB)?
The Volume-Weighted Average Rate of Borrowing (VWOB) is the key calculation used to determine the SORA rate.
It is a measure of the total volume of borrowing transactions that take place within the interbank SGD cash market in Singapore over a given period of time, divided by the sum of the volumes of all transactions.
How Does the MAS Determine the SORA Rate?
The MAS determines the SORA rate by adding up all eligible transactions that take place within the interbank SGD cash market between 9:00 a.m. and 6:15 p.m. on each business day.
The transactions are weighted by volume and are computed using an algorithm that incorporates both arithmetic and geometric averaging methods.
Exploring the Benefits of Refinancing Your Home Loan with SORA
What are the Advantages of Refinancing with SORA?
Refinancing your home loan with SORA can offer a number of advantages, such as increased flexibility, greater transparency, and a potentially lower interest rate.
SORA-based loan packages often come with more flexible repayment terms, allowing borrowers to customize their monthly instalments to suit their individual needs.
Moreover, because the SORA rate is derived from actual transactions in the interbank market, it is transparent and free from manipulation or any form of rate fixing.
Finally, due to its current low rates, borrowers who refinance with a SORA-based loan package can potentially enjoy lower interest rates on their mortgage loans.
How Can Homeowners Benefit from Choosing a SORA-
Based Loan Package?
Homeowners can benefit from a SORA-based loan package by enjoying lower borrowing costs, greater transparency, and flexibility in terms of their loan repayments.
As the SORA rate is based on actual interbank market transactions, it is an objective and reliable benchmark interest rate.
Borrowers can also benefit from the flexibility of a SORA-based loan package, which allows for customized monthly instalment amounts based on their specific financial conditions.
Furthermore, since the SORA rate is derived entirely from the interbank market, it can result in lower borrowing costs for mortgage loans, leading to lower monthly instalments.
What Are the Risks of Refinancing with SORA?
The main risk of refinancing with a SORA-based loan package is the potential for interest rates to increase over time, leading to higher monthly instalments for borrowers.
Another potential risk is the fact that SORA is relatively new and untested, compared to other benchmark interest rates such as the Singapore Interbank Offered Rate (SIBOR).
As such, there is a greater level of uncertainty regarding how the SORA rate might behave under different market conditions and economic environments.
The Role of SORA as a Benchmark Interest Rate
What is a Benchmark Interest Rate?
A benchmark interest rate is a standard, agreed-upon reference rate that is used to price various financial products, such as loans and derivatives.
Benchmark interest rates are typically based on the interbank market or on government-issued bonds and are considered to be objective and reliable indicators of borrowing costs.
How Does a Benchmark Interest Rate Affect Borrowing
Rates?
The benchmark interest rate serves as the basis for pricing financial products, such as loans and derivatives.
Borrowing rates are then calculated by adding a margin, or spread, to the benchmark rate.
As such, any changes in the benchmark rate will directly affect borrowing rates.
What is the Role of SORA as a Benchmark Interest Rate in
Singapore?
SORA is a benchmark interest rate that is unique to Singapore and reflects the borrowing costs of financial institutions within the interbank SGD cash market.
While SORA is not yet as widely used as other established benchmark rates such as SIBOR, it is gaining traction as a reliable and transparent alternative.
In recent years, more and more financial institutions in Singapore have been offering SORA-based loan packages, signaling growing acceptance of the benchmark interest rate.
Comparing SIBOR and SORA: Which is the Better Option for Home Loans?
What is SIBOR?
The Singapore Interbank Offered Rate (SIBOR) is a benchmark interest rate that represents the average borrowing cost of financial institutions within the interbank SGD cash market in Singapore.
SIBOR is generally considered to be a key benchmark in the loan market in Singapore and is widely used by financial institutions.
What is the Difference Between SIBOR and SORA?
The main difference between SIBOR and SORA is the method used to determine the benchmark rate.
SIBOR is based on a survey of various banks in Singapore, while SORA is based on the volume-weighted average rate of borrowing transactions in the interbank SGD cash market.
In other words, while SIBOR is an estimate based on surveys, SORA is based on actual transactions.
Additionally, SIBOR is a forward-looking rate, while SORA is backward-looking.
This means that SIBOR is calculated based on anticipated borrowing costs, while SORA reflects actual borrowing costs.
Which Interest Rate Benchmark is Better for Home Loans:
SIBOR or SORA?
Ultimately, the decision to choose SIBOR or SORA for a home loan will depend on the individual borrower’s preferences, financial conditions, and risk appetite.
While SIBOR is an established benchmark rate with a longer track record, SORA is transparent and based on actual transactions.
SORA-based loans can also offer greater flexibility and customization options for borrowers.
Analyzing the Impact of the 3-Month Compounded SORA on Borrowing Rates
What is the 3-Month Compounded SORA?
The 3-Month Compounded SORA is a benchmark that reflects the volume-weighted average rate of borrowing transactions that take place within the interbank SGD cash market over a three-month period.
It is backward-looking and is calculated by compounding the daily SORA rates over the three-month period.
How Does the 3-Month Compounded SORA Affect
Borrowing Rates?
The 3-Month Compounded SORA directly affects borrowing rates for loans that are priced based on this benchmark interest rate.
As the benchmark rate changes, the borrowing rate for loans based on this rate will change as well.
What Are the Pros and Cons of the 3-Month Compounded
SORA?
The main advantage of the 3-Month Compounded SORA is that it reflects actual borrowing costs and is transparent, which can help to prevent any manipulation or rate fixing.
On the other hand, some consumers may hesitate because the rate is backward-looking and could be subject to sudden movements in the market.
As such, it is important for borrowers to consider their individual financial conditions and risk appetite before opting for a loan package based on this benchmark interest rate.
How SORA Rate Affects Different Loan Packages in Singapore
What is SORA rate and how is it calculated?
SORA is short for Singapore Overnight Rate Average.
It is the volume-weighted average rate of overnight borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6 pm.
The SORA rate is calculated and published daily by the Monetary Authority of Singapore (MAS), in partnership with the Association of Banks in Singapore (ABS).
Why is SORA rate important as a benchmark interest rate
for loan packages?
SORA rate is increasingly becoming popular as a benchmark rate for loan packages in Singapore because it more accurately reflects current market conditions compared to SIBOR.
SIBOR is based on interbank transactions of USD, while SORA rate is based on the Singapore dollar.
SORA rate is therefore a more transparent and reliable benchmark rate for financial markets that are denominated in SGD.
How does SORA rate differ from SIBOR?
SIBOR is the interest rate that banks offer as the cost of borrowing SGD dollars from each other.
It is derived from the average interest rate that banks offer for borrowing SGD in the Singapore interbank market.
On the other hand, SORA rate is the cost of borrowing SGD dollars overnight in the unsecured interbank market.
SORA rate is calculated based on all transactions that take place throughout the day, while SIBOR is calculated based on a daily snapshot.
SORA rate, therefore, captures the full range of borrowing transactions and is less prone to manipulation.
Exploring the Transition from SIBOR to SORA: What Borrowers Need to Know
Why is there a shift from SIBOR to SORA rate as the
benchmark for loan packages?
One of the main reasons for the shift from SIBOR to SORA rate as the benchmark for loan packages is the possibility of discontinuation of SIBOR beyond 2021.
SIBOR is based on interbank borrowing transactions that are becoming thinner as the volume of transactions declines, raising questions on the sustainability and reliability of the benchmark rate.
SORA, being based on borrowing transactions in the SGD cash market, is seen as a more reliable and transparent benchmark rate.
What changes will borrowers experience during the
transition process?
Borrowers who hold loans that are pegged to SIBOR may experience changes in their loan rate when the transition to SORA takes place.
Banks in Singapore are providing different options for loan servicing that include either a switch to SORA-based loan packages or remaining tied to SIBOR.
In the former case, borrowers may experience lower loan rates while in the latter case, their interest rates may remain unchanged or even rise depending on market conditions.
How will the transition impact historical loan rates and
ongoing mortgage repayments?
The transition from SIBOR to SORA will result in a change in the benchmark interest rate used for calculating interest rates on mortgage loans.
Borrowers holding SIBOR-pegged loans may see their interest rates fluctuate during the transition phase.
While ongoing mortgage repayments may be affected in the short term, the impact is expected to be minimal.
Examining the Historical Performance of SORA Rate Over a 3-Month Period
How has SORA rate performed historically over a 3-month
period?
According to the MAS, SORA rate has consistently tracked a narrow range over the past year.
However, the rate is subject to fluctuations and may respond to changes in market conditions, such as inflation expectations, economic growth, and changes in monetary policies.
What factors influence the fluctuations in SORA rate?
Fluctuations in SORA rate are driven by various factors, including changes in the supply and demand for SGD liquidity, market expectations about interest rates, and the level of economic activity.
The performance of the SORA rate is therefore closely linked to the overall performance of Singapore’s economy.
In what ways does SORA rate reflect current market
conditions?
SORA rate measures the rate of overnight borrowing of SGD-denominated cash between banks in the Singapore interbank market.
The rate is an accurate reflection of the current state of the money market and a reliable indicator of interest rates in the Singapore lending market.
A higher SORA rate may indicate a tighter liquidity situation in the market, while a lower rate may indicate easier liquidity conditions.
Understanding the Differences Between 1-Month Compounded SORA and 3-Month Compounded SORA
What are the key differences between 1-month and 3-
month compounded SORA?
The main difference between 1-month and 3-month compounded SORA is the underlying tenor of the interbank borrowing transactions that are used to calculate the rate.
1-month compounded SORA measures the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market over a period of one month.
On the other hand, 3-month compounded SORA measures this average over a period of three months.
How do these differences impact the calculation of interest
rates for loan packages?
The choice between 1-month and 3-month compounded SORA for loan packages will have implications on how the interest rate for the loan is calculated.
Loan packages that are pegged to 1-month compounded SORA will have a more responsive interest rate to the fluctuation in SORA rate compared to those that are pegged to 3-month compounded SORA.
What factors should borrowers consider when deciding
between 1-month and 3-month compounded SORA for their
loan packages?
Borrowers should consider their risk appetite and interest rate expectations when deciding between 1-month and 3-month compounded SORA for their loan packages.
1-month compounded SORA may be a preferable option for borrowers who expect interest rates to remain volatile or are willing to take on more risk for potentially lower loan rates.
On the other hand, 3-month compounded SORA may be more suitable for those who prioritize stability in the loan rate and are willing to accept a less responsive interest rate.
The Importance of SORA as a Reference Rate in the Financial Markets
How do market participants use SORA as a reference rate
for cash market products and investment products?
Since SORA rate is a transparent benchmark for SGD cash market products, it is widely used as a reference rate for cash market products like deposits and loans.
Investors also use SORA rate to hedge against interest rate risks, as it provides a better reflection of the current market conditions that SGD-denominated bonds and other investment products face.
Why is SORA considered a transparent benchmark rate for
financial markets?
SORA is considered a transparent benchmark rate for financial markets because it is published daily by MAS and ABS.
The methodology used to calculate SORA rate is also transparent, providing market participants with the required information to make informed decisions.
This transparency has made SORA rate a reliable and widely used benchmark rate in SGD-denominated markets.
How does SORA rate influence inflation rates and other key
interest rate benchmarks?
SORA rate influences inflation rates and other key interest rate benchmarks by reflecting the state of the SGD cash market.
Fluctuations in SORA rate may have an impact on economic growth, and borrowing costs, and ultimately contribute to inflationary pressures.
Other interest rate benchmarks like the Swap Offer Rate (SOR) may also be influenced by SORA rate, as it is used as a reference rate for the calculation of SOR.
How SORA Rate Influences Mortgage Rates in Singapore
How are mortgage rates in Singapore affected by changes
in SORA rate?
Mortgage rates in Singapore are affected by changes in the SORA rate.
SORA-pegged home loans have a floating rate, which means that the interest rate fluctuates with changes in the SORA rate.
When SORA rate is high, borrowers will pay higher interest rates on their loans, while low SORA rates will result in lower interest rates.
What factors impact the credit risk and credit quality of
borrowers with SORA-pegged home loans?
The credit risk and credit quality of borrowers with SORA-pegged home loans are influenced by factors such as their income and credit history.
A borrower with a stable income and a good credit score may be able to secure a lower interest rate on their SORA-pegged home loan compared to a borrower with a lower credit score or unstable income.
Understanding SORA Rate and Its Importance in Home Loans
What is SORA Rate?
SORA stands for Singapore Overnight Rate Average and is a daily rate based on the weighted average of all eligible transactions in the overnight interbank funding market.
It is calculated by the Monetary Authority of Singapore (MAS) every business day in Singapore.
Why is SORA Rate Used as an Interest Rate Benchmark in
Home Loans?
SGD SORA was introduced as an alternative to the Singapore Inter-bank Offered Rate (SIBOR) and Swap Offer Rate (SOR) by the MAS with the aim of replacing SIBOR completely by 2024.
SORA rate is considered a more robust benchmark rate as it is based on actual transactions, whereas SIBOR is calculated by banks using their estimated borrowing costs.
SORA rate is also more aligned with global regulatory reform of financial benchmarks.
How is SORA Rate Calculated?
SORA is calculated by taking the average rate of all eligible transactions in the overnight interbank funding market over a 3-month historical period, then adding a spread adjustment.
The spread adjustment is designed to align SORA with the SOR rate and takes into account the historical spread between 3-month SORA and a 3-month SOR over a lookback period.
Comparing Fixed-Rate and Floating-Rate Home Loans Tied to SORA
What is the Difference Between Fixed-Rate and Floating-Rate Home Loans?
Fixed-rate home loans have a set interest rate for a fixed period, typically between one to five years, after which the rate can shift up or down based on market fluctuations.
Floating-rate home loans, on the other hand, have interest rates that fluctuate according to a benchmark rate such as SORA.
How Does SORA Affect Fixed-Rate and Floating-Rate Home Loans?
For floating-rate home loans, the interest rate can change on a daily basis based on the SORA rate.
The repayment amount can therefore fluctuate depending on the SORA rate, which can be beneficial if interest rates are low but can be risky if rates suddenly spike.
For fixed-rate loans, SORA is not as relevant as the interest rate is fixed for the lock-in period.
However, the lock-in period could be longer for SORA-based home loan packages since the SORA rate is based on a 3-month period.
Which Type of Home Loan Is Best for Me?
Choosing between a fixed or floating-rate home loan package tied to SORA depends on your risk appetite.
If you prefer certainty in your monthly repayments, a fixed-rate loan may be better suited to you.
On the other hand, if you have a higher risk tolerance and believe that interest rates will remain low for a prolonged period, a floating-rate home loan might make more sense.
Exploring the Various Home Loan Packages Based on SORA Rate
What Are the Different Types of Home Loan Packages
Based on SORA Rate?
Several lenders in Singapore offer home loan packages tied to SORA rate with varying features such as interest rate type and lock-in period.
For example, some packages may offer a fixed SORA interest rate for a few years before converting to floating rate.
Others may have a longer lock-in period, which means you are required to stick to the loan until the end of that period or risk paying a penalty fee.
What Are the Advantages and Disadvantages of SORA-
Based Home Loan Packages?
The main advantage of SORA-based home loan packages is that they are based on a more reliable interest rate benchmark that is less subject to manipulation by banks.
Another advantage is that SORA can be used for purposes such as asset-liability pricing and SORA-based derivatives trading purposes.
Disadvantages of SORA-based home loan packages include the uncertainty of future SORA rates and the fact that the benchmark is less established than SIBOR.
In addition, SORA rates may not always move in the same direction as other economic indicators.
Finally, there’s the possibility of unforeseen fees that are not included in the rate package.
How Can I Choose the Best SORA Home Loan Package for
Me?
Choosing the best SORA-based home loan package for you ultimately depends on your circumstances and preferences.
Work with a qualified mortgage specialist who can help you compare the features and rates of different packages.
Take note of the lock-in period, any additional fees, and the spread adjustment applied to the SORA rate, among others.
The Future Outlook of SORA Rate: Forecasts and Implications for Borrowers
What Is the Forecast for SORA Rate in the Next Few Years?
SORA rates are expected to remain relatively stable in the near term, with some experts projecting a range of between 0.
8% and 1% over the next few years.
However, as with any variable rate benchmark, there is always the possibility of sudden spikes or drops in rates, which can have implications for borrowers.
How Will Changes in SORA Rate Affect Borrowers?
Changes in SORA rates will directly affect the repayment amounts of borrowers who have floating-rate SORA home loans.
This means that if SORA rates rise suddenly, borrowers may face higher monthly repayments for their housing loans.
On the other hand, if SORA rates decline, borrowers may benefit from lower monthly repayments.
What Should Borrowers Look Out for When Taking Out a
SORA-Based Home Loan?
Borrowers should be aware of the technicalities of the SORA rate and how it affects their loans.
For example, a 3-month compounded Singapore overnight rate average is the benchmark used for some packages, whereas others may use the 1-month SORA rate.
Borrowers should also be aware of the average rate of all eligible transactions and the calculation method used by lenders.
Understanding these technicalities can help borrowers make informed decisions about their housing loans.
SORA is an emerging interest rate benchmark that has gained popularity among lenders and borrowers in Singapore’s residential property loan market.
While it offers some advantages over other benchmarks, it also has certain drawbacks that borrowers need to be aware of.
Understanding the intricacies of SORA rate can help property buyers make informed decisions about their housing loans.
Conclusion
In conclusion, understanding the SORA Rate and its significance is crucial for borrowers and investors in Singapore.
As a benchmark interest rate derived from actual borrowing transactions in the interbank SGD cash market, SORA provides transparency and reliability.
It serves as a pricing basis for various SGD-denominated financial products, including loans and derivatives, offering increased flexibility and potential cost savings.
The transition from SIBOR to SORA as the benchmark rate for loan packages is driven by the need for a more sustainable and accurate benchmark.
While borrowers may experience changes in their loan rates during the transition, SORA-based loan packages offer transparency and customization options.
To explore more informative articles on related topics, we encourage you to check out our other blog articles.
Gain further insights into the transition from SIBOR to SORA, the historical performance of SORA rate, and the implications for different loan packages in Singapore.
Stay informed and make informed decisions about your financial needs.
Frequently Asked Questions
What is SORA rate?
SORA stands for Singapore Overnight Rate Average.
It is the new benchmark interest rate for loans in Singapore, which replaces the previous benchmark rate known as the Singapore Inter-bank Offered Rate (SIBOR).
How is SORA calculated?
SORA is calculated based on the rates banks offer for overnight interbank funding in the Singapore wholesale money market.
It is based on actual transactions between banks that take place on a daily basis and is published by the Monetary Authority of Singapore (MAS) since July 2019.
What is the difference between 3-Month SORA and SIBOR?
3-Month SORA and SIBOR are both benchmark rates used for residential property loans in Singapore.
However, SIBOR is based on indicative quotes submitted by banks while 3-Month SORA is based on actual transactions.
SORA-based derivatives are used for asset-liability pricing and trading purposes.
How is the SORA rate used for loan rates?
SORA rate is used as a reference rate for floating rate home loans.
Banks set their loan interest rates by adding a spread or margin to the published SORA rate over the historical 3-month period.
This means that homeowners with SORA-based home loans will see changes in their loan interest rates as the SORA rate changes.
What is a SORA package?
A SORA package is a loan package that is tied to the SORA rate.
This means that the loan interest rates will be adjusted according to changes in the SORA rate.
Some banks may offer promotions or incentives for customers who sign up for SORA packages.
Can SORA be used for loans in residential properties or only for private properties?
SORA can be used for loans in both residential properties and private properties in Singapore.
Is there a lock-in period for SORA-based loans?
The lock-in period for SORA-based loans will vary depending on the bank and loan package.
Some loan packages may have a lock-in period of 1 to 3 years, while others may have no lock-in period.
Why is SORA considered a more robust benchmark compared to SIBOR?
SORA is considered a more robust benchmark compared to SIBOR because it is based on actual transactions rather than indicative quotes.
This means that sudden spikes or irregularities in the market will not affect the calculation of the SORA rate as much as it would for SIBOR.
Can historical 3-month SORA rates be used for technical analysis or as economic indicators?
Historical 3-month SORA rates can be used for technical analysis or as economic indicators to evaluate trends and market movements in the Singapore wholesale money market.
Where can I find the daily published SORA rate?
The daily published SORA rate can be found on the MAS website.
MAS also provides data on all eligible transactions traded and booked for SORA for a given business day, as well as data on all eligible counterparties for a given business day.
