Buying a property in Singapore is probably the biggest ticket item you will ever purchase and paying off a home loan is probably the longest financial commitment you will face.
In today’s article, we will look at interest rate benchmarks - SIBOR, SOR and SORA.
Banks use these benchmarks to determine how much interest to charge when giving out loans and how much or to pay out for deposits.
Such interest rate benchmarks fluctuate on a day-to-day basis.
So, having your interest rate pegged to them means it will constantly change, too.
Some benchmarks can also be averaged out over a longer period and the interest rate will fluctuate once every 3 months.
1. SIBOR (Singapore Interbank Offered Rate)
SIBOR stands for Singapore Interbank Offered Rate and is the rate that Singaporean banks can borrow money from each other via the interbank market.
This is the most common benchmark to which home loan interest rates are pegged.
SIBOR is administered by the Association of Banks in Singapore (ABS), which is a non-profit organisation that represents the interests of the commercial and investment banking community in Singapore.
The SIBOR rate can be found on the ABS’s website and updated about 11.30 am each business day.
Currently, most home loans, especially floating interest rate loans are based on SIBOR.
However, SIBOR is expected to be phased out by the end of 2024 as the MAS is encouraging the adoption of SORA ( please see the section below on SORA).
2. SOR (Singapore Dollar Swap Offer Rate)
SOR stands for Singapore Dollar Swap Offer Rate and is defined as the benchmark for deposits in Singapore currency.
SOR represents the effective cost of borrowing the Singapore Dollar (SGD) synthetically by borrowing the US Dollar (USD) for the same maturity and swap out the USD in return for the SGD.
Simply put, it measures the cost of borrowing USD and then converting it to SGD through a foreign exchange swap.
However, SOR will become obsolete as banks and financial institutions will have to cease the use of the Swap Offer Rate (SOR) in new derivatives contracts by the end-September 2021.
According to the MAS, this is to allow the financial industry to push towards the adoption of the Singapore Overnight Rate Average (Sora) as the main interest rate benchmark.
3. SORA (Singapore Overnight Rate Average)
SORA stands for Singapore Overnight Rate Average which is the volume-weighted average rate of overnight, unsecured borrowing transactions between banks in the Singapore cash market.
What this means is that calculations are based on the actual amount being lent in the overnight interbank market. It is administered by the Monetary Authority of Singapore (MAS), and published at 9 am on the next business day in Singapore.
As the MAS is phasing out SOR and SIBOR by September 2021 and end-2024 respectively, all existing home loans currently pegged to SIBOR and SOR will be converted to SORA.
Below is an illustration of the difference between SORA vs SIBOR home loans.
Already, banks such as DBS and OCBC, have started offering SORA-based home loan packages.
These packages are available for all loan types - completed properties, properties under construction, new home loans and repricing of existing home loans.
Generally speaking, SORA offers better visibility on interest rates and should benefit those looking for home loans.
To find out more about SORA-based home loans, it is best to speak with the respective banks for a more complete picture.
Have a question? Feel free to comment below.
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