As you prepare to find your dream house, you may come across a few words that are new to you, such as the Singapore Overnight Rate Average (SORA) and the Singapore Interbank Offered Rate (SIBOR). These are the interest rates used by banks to determine the various mortgage packages offered to consumers.
Even though these terms typically don’t concern consumers, home buyers will certainly come across them as they look for mortgages. Here’s a brief overview of what these indicators are, how they differ, how they impact your mortgage, and more.
Let’s unpack these so you’ll get to better understand them and perhaps lower that anxiety a tad.
SORA, known as Singapore Overnight Rate Average, is a backward-looking overnight rate based on real transactions between banks from 8am to 6:15pm in Singapore.
SIBOR and SOR are forward-looking future overnight rates based on future transactions, whereas SORA is based on the previous day’s overnight transactions.
Since all of these interest rate benchmarks change on a daily basis, your loan payments will also change if your loan is linked to them. You can, however, choose for a loan package with less frequent “refreshing” of the interest rate—for example, once every three months—for more stability.
The nature of your floating-rate housing loan payments is somewhat more economical than those on fixed-rate loans, but you’ll need to handle the uncertainty related to market changes.
As is the case with SIBOR-linked loans, you’ll need to decide how frequently you’d like to have your interest rate refreshed. You can currently choose between 1-month or 3-month compounded SORA loan packages at most bank branches in Singapore.
Your interest payments will vary from month to month or quarter to quarter, respectively.
Singapore’s Monetary Authority (MAS) announced MAS SORA, a new benchmark interest rate, in August 2019. SIBOR, SOR, and SIBOR will be phased out by 2021 and 2024, respectively.
Why Switch to SORA?
The switch to SORA is caused by the fact that the computation of SIBOR and SOR rates utilises the scandal-plagued London Interbank Offered Rate (LIBOR). Bankers at prominent financial institutions who engaged in fraudulent LIBOR manipulations were implicated in a scandal. As a result, significant fines and lawsuits were carried out and this incident eroded trust in the financial industry and in the marketplace in general. This incident eroded trust in the public and financial sectors as a result.
Prior to the LIBOR scandal, banks set their mortgage rates based on SIBOR (or SOR, when relevant). Because LIBOR was so unreliable, this directly impacted SIBOR- and SOR-linked loans, the authorities of many nations, including Singapore, called for a global overhaul of financial standards to improve their reliability and integrity. As a result, SIBOR and SOR will be replaced with SORA.
SORA is regarded as a more legitimate benchmark than its predecessors because it is based on actual transactions and complies with international standards. Furthermore, SIBOR and SOR are based on future transactions rather than backward-looking overnight transactions, which makes them less volatile and less risky than SORA. Banks must switch from SOR to SORA by the end of 2021, whereas the transition from SIBOR to SORA will take place over the next three years.
2024 SORA Deadline
SORA wasn’t created that recently, but its pricing methodology hasn’t really changed in the finance business. In fact, it has been pricing certain commercial loans since 2005.
Banks must provide data on all eligible transactions traded and booked in the unsecured overnight interbank market between 8am and 6.15pm to calculate SORA.
MAS will then verify the information and compute the weighted average rate of all eligible transactions. This rate will be published on the MAS website the following day at 9am.
Fixed or floating interest rate home loans are available if you’re looking to refinance your current home or purchase a new one.
By 2024, SIBOR will be eliminated. As we move towards the end of SIBOR-pegged loans, banks are beginning to offer SORA-based ones instead. As a result, even if you currently have a mortgage pegged to the SIBOR or SOR, you will switch over to a SORA-based loan or a fixed-rate mortgage once your loan expires.
Do SORA-pegged home loans merit consideration?
Since 2020, some significant banks in Singapore have released SORA-linked mortgages. The 3 month SORA (3-month compounded Singapore overnight rate average) is a volume-weighted average rate compounded for three months, which is the most frequent.
The MAS publishes the MAS SORA rate on its website at 9am on the first business day of the month.
To see the latest SORA rates by MAS Click Here
A quick Snap shot of SORA- pegged home loan In Singapore is:
The rates are constantly changing with banks constantly updating. There’s also usually promotions for loans launch by banks usually almost every week. If you like the latest rates contact us and we’ll be happy to give you the latest.
Let me give you an example to help you understand: You and your spouse want to borrow $500,000 from DBS to purchase a resale HDB apartment, and you would like a 25-year loan with SORA-pegged interest rates.
3-month Compounded SORA rate of 1.3016% (as of 4 August 2022) to determine the SORA-pegged home loan packages.
Assuming DBS has a 3 year Lock.
Year 1 – SORA + 0.62%
Year 2 – SORA + 0.67%
Year 3 – SORA + 0.77%
Thereafter – SORA + 1%
SORA = 1.3016%
The Biggest factor in the loans is basically in where SORA will be in a few years. Something that will might be a little to predict. But we can look at the historical data for the past 2 years.
If you like to do your own math on interests rates, we have a calculator for you here.