With the rising price trends and high cost of living in Singapore, home loans have become one of the more important considerations for many home owners to take on without over leveraging (TDSR).
When searching on the various home loans in Singapore, you will come across (in some shape or form) the terms SIBOR, SORA or SOR.
We recently got in touch with Rayner Teh, Chief Operating Officer from Mortgage Master, to find out more about the different benchmark rates and what all of it would mean for current and future home loans.
To put it simply, all 3 terms above actually refer to a reference rate that is pegged to floating rate home loans to help determine the final interest cost. Currently, there are two types of home loans you can go for: fixed rate home loan or floating rate home loan.
Surprisingly, the interest rates for fixed rate home loans only remain the same for about 2-3 years, after which it will be pegged to reference rates like SIBOR. On the other hand, floating rate home loans are subjected to adjustments, where the interest rate can change periodically and in turn affect your monthly instalment amount.
Though there are seemingly 3 types of benchmark interest rates to choose from, it is noteworthy to know SOR is pretty much phased out for home loans and banks have stopped offering the option as it isn’t as favored as the other two due to its volatility.
SOR vs SIBOR vs SORA
The SOR is a rate that relies on the US Dollar London Interbank Offered Rate (USD LIBOR) for its computation. As mentioned in the table above, this refers to the rate in which SGD is borrowed synthetically through borrowing USD, and then converting it back to SGD.
Due to the volatility of its nature and the likely discontinuation of LIBOR after this year, SORA was recommended to replace SOR as a more suitable and stable benchmark on 30 August 2019.
The current most common benchmark home loans are pegged to is SIBOR, derived based on the interest rate Singapore banks can borrow from each other via the interbank market.
The way this rate is calculated is actually based on the submissions from 20 banks every working day. Through the 20 submissions, the top 5 and bottom 5 rates are removed, and an average is taken from the remaining 10. This average will then be set as the SIBOR for that day.
This supposedly ‘new’ benchmark has actually been around since 2005, and has only been suggested in recent years to replace SOR and SIBOR. It is computed via the calculation of volume-weighted average rate of borrowing transactions in an unsecured overnight interbank market every working day.
SORA bears a similarity to SIBOR in the sense that it measures the lending rate for unsecured loans and it is also not influenced by foreign exchange. However, SORA takes the average of ALL transactions instead of the more complex way of SIBOR which removes the top and bottom 5, also making it more transparent.
The LIBOR Scandal recently where bankers in several major financial institutions colluded to manipulate the rate has sowed a huge amount of distrust in the financial world, and as a result will be fully phased out by 30 June 2023.
As SOR is highly dependent on LIBOR, it will also be fully discontinued after 30 June 2023.
In line with all these reforms, SIBOR will also follow suit and be discontinued soon, to be replaced by the more stable SORA. According to Association of Banks Singapore (ABS), the 6-month SIBOR will be discontinued on 31 March 2022 whilst the more commonly used 1-month and 3-month SIBOR will only be discontinued after 31 December 2024.
With the news of the discontinuation of two other benchmark rates, you might be wondering when will SORA be implemented then? Though it has been around since 2005, it was only identified in 2019 as a suitable replacement and the first SORA home loan package was only launched in July 2020 by OCBC.
Since then, major banks have started rolling out their SORA home loan packages.
Comparatively, SORA is a more robust and reliable benchmark, while also offering more transparency. It was also meant to be an enhancement as well as a fairer way for rate adjustments when weighed up against SIBOR, putting more emphasis on transactional values in Singapore.
As SORA has been around since 2005, there is a long period of data that market participants can make use of to perform more analysis and get a better gist of the trends for more risk management.
SORA is expected to have similar movements when compared to SIBOR. With the current variety of options for floating rates between SIBOR, SORA, FD-linked rates as well as board rate’s, Rayner’s opinion is that the 1-month or 3-month average for SORA is slightly *less volatile when pitted against SIBOR or Board Rates.
*Volatility mentioned here only refers to the frequency of change but not the volume per change
Though banks have yet to officially announce what will happen to SIBOR package holders by 2024, judging by the new home loan packages that have been released, it is clear to see that most of them have already stopped offering SIBOR related packages.
It is unlikely that banks will implement any changes without first consulting the clients. Whilst no particular action is required from SIBOR home loan holders at this point, considering past trends, we can expect banks to get in touch with these holders to do a repricing in order to convert to a new SORA package in 2024.
“It really depends on the loan size and timing of the home loan application as banks change their package quite frequently.”, Rayner remarked. “Instead of looking exclusively at which bank to apply at, I advise homebuyers to look at the spread of available SORA packages on the whole.”.
For homeowners who are unsure about which package to go for, you may seek assistance from Mortgage Master to provide more detailed information across all banks in order to convey the best home loan package that will suit your needs.
As of today, any SORA package taken with a "spread" that is lower than 1% is considered a good package. One piece of advice he would like to share is to monitor the interest rate once the lock-in period is within 3-4 months of ending so homebuyers can seek out a better package to refinance if needed. In the event where you’re unsure about how you can do this, Mortgage Master already has a platform at the ready that is programmed to monitor lock-in periods on behalf of their clients.
If you are worried about what all this would mean for you, fret not as the transition will be gradual and it will still take a few years till SORA takes effect. In the meantime, make good use of this period to go through your options and compare the different home loans that are offered by banks in Singapore.
For more information with regards to which home loan would match your needs the best or any other questions regarding home loans in Singapore, feel free to contact us and we will get back to you shortly.