If you’ve bought a house and are about to take up a housing loan, we’re sure you’ve come across these terms: SORA, SIBOR and SOR. So, what exactly are they?
As a whole, the three “S”s are Singapore’s industry-wide benchmark interest rates for determining the floating bank loan interest rates.
SORA stands for the Singapore Overnight Rate Average, SIBOR for the Singapore Interbank Offered Rate, and finally SOR is the acronym for the Singapore Swap Offer Rate.
Wah, so many, how to differentiate? Don’t worry. Actually, you only have to acquaint yourself with SORA now. The reason is: Singapore is gradually eliminating both SIBOR and SOR due to the phasing out of the scandal-tainted LIBOR (London Interbank Offered Rate). With only SORA, the Singapore government hopes to ensure greater trust industry-wide.
SOR has already been eliminated last year while SIBOR’s turn will come in 2024. From 2022, SORA will be the new standard benchmark interest rate.
So for now, you will have various SORA (and possibly SIBOR) rates to pick from when you take up a floating rate bank loan to finance your home.
SORA explained
According to the Monetary Authority of Singapore (MAS), SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8am and 6.15pm. This rate, which your bank loan interest rate will depend on, is published on the MAS website at 9am the next day.
SORA rates are published on the MAS website at 9am the next day
Why the next day? This is because unlike SIBOR, which takes the average of a couple of banks, SORA is based on overnight transactions that happened the day before. Hence, SORA is backward-looking whereas SIBOR is forward-looking. Because of this SORA is considered to be more accurate and stable.
Moreover, unlike SIBOR, SORA does not depend on international interest rates. Hence SORA interest rates are less volatile and changes are more gradual.
SORA and your home loan interest rates
So, what has SORA got to do with your home loan?
If you’re taking up a housing loan (which most people do unless you’re super rich!), you’ll be out shopping for the best home loan package in town, be they fixed or floating rate packages. If you choose a floating rate package, then that’ll be pegged to SORA, so that’s how SORA comes into play in your home loan.
Let’s say you’ve chosen the floating rate package and your banker asks you if you want a 1-month or 3-month SORA package. “What’s the difference?” you ask.
Simple. For the 1-month package, your interest rate changes from month to month and it is computed based on the SORA rates compounded within the month. Similarly, for the 3-month package, your interest rate is renewed quarterly, so depending on your luck, it’ll either go up or down. If it goes up, you’ll have to pay more and vice versa.
Example of SORA home loans in Singapore
The three local banks and several foreign banks offer SORA home loans. Every bank designs their SORA mortgages differently. Here are two examples each from local and foreign banks:
In August, DBS offered a “2-year lock-in 3-month SORA + 1% per annum” home loan package whereas OCBC offered a “1-month compounded SORA” home loan.
If you don’t find that attractive enough, here’s what two foreign banks offered:
Malaysian bank, RHB, offered a “3-month SORA package” while HSBC offered a “1-month compounded SORA”.
Is this the time to take a SORA home loan?
There are essentially two kinds of home loans: fixed- and floating-rate loans. SORA is a floating-rate loan. For floating-rate home loans, the interest rate varies according to changes in the lender’s benchmark rate.
As market forces govern the floating-rate loan, the amount you pay in monthly instalments will change according to the changes in interest rate. This means that you will rejoice when the rates plummet, but start getting agitated when it spikes.
To know whether to choose a floating or a fixed-rate loan is to understand the current market situation.
In a 30 June 2022 report, CNA warns homeowners to brace themselves for a “big interest rate shock”. Currently, the US is facing unruly domestic inflation. To tame this, its central bank – the US Federal Reserve – has, up to September 2022, revised its interest rates upwards four times. The bad news is, there could be more hikes to come.
Besides inflation, the Fed is also upping its interest rate due to post-pandemic supply chain disruptions, the Russia-Ukraine war, and oil and gas price increases.
Interest rates are currently on the rise
Being a small and open economy, any movements in the world’s biggest economy will have an impact on Singapore. Which is why, many Singapore homeowners are now playing it safe to either go for a fixed-rate loan or a hybrid (a mix between a fixed and floating-rate loan). In other words, homeowners are staying away from SORA home loans for the time being, and probably so should you unless you’re flushed with liquid funds at the moment.
In this article, we’ve explained what SORA interest rates are and how they affect home loans. If you want to know more, schedule a visit with us or book a free consultation with our trusted and renowned representatives.
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