Embarking on a home loan can be a daunting process, especially when you’re unfamiliar with the meaning of abbreviated interest rates like the Singapore Overnight Rate Average (SORA), Singapore Interbank Offered Rate (SIBOR), and Swap Offer Rate (SOR). But don’t worry! Whether you’re taking out a bank loan for the first time or looking to refinance your mortgage, understanding these loan terms is incredibly useful. The good news is, you’ve come to the right place!
Here’s an article explaining the meaning of SORA vs. SIBOR vs. SOR and how these rates affect your home loan, which can give you a preliminary understanding. But if you already know what these rates are, let’s dive deeper into the most important of the three: the Singapore Overnight Rate Average (SORA).
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Why Focus on SORA?
In short, SORA, SIBOR, and SOR represent the three industry-wide benchmark rates used in Singapore to determine floating interest rates for bank loans. However, the good news is: in the future, you will only need to consider bank loans pegged to SORA.
In parallel with the phasing out of the scandal-ridden London Inter-Bank Offered Rate (LIBOR), Singapore is also phasing out SIBOR and SOR to foster greater trust within the industry. SIBOR and SOR are being discontinued in 2024 and 2021, respectively, with SORA becoming the new standard benchmark rate used from 2022 onwards.
Therefore, if you plan to buy a home in the future and want a floating-rate bank loan, you can choose from various SORA (and possibly SIBOR) floating-rate packages to finance your house. If you are already a homeowner with a SIBOR-pegged loan package, you might consider switching to a SORA-pegged loan, as SIBOR will be phased out. But first, let’s continue to understand…
What is SORA?
The Singapore Overnight Rate Average (SORA) is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 a.m. and 6:15 p.m. This rate will be published at 9 a.m. the next morning on the Monetary Authority of Singapore (MAS) website and will serve as the basis for your bank’s loan interest rate.
1-Month SORA VS 3-Month SORA
If you opt for a floating-rate SORA home loan package, you will choose between a 1-month compounded (1M SORA) and a 3-month compounded (3M SORA) SORA loan. What’s the difference between these two mortgage packages? The difference lies in how often you can choose to have your mortgage interest rate updated.
For a 1-month SORA home loan package, your interest rate will be updated monthly based on the compounded SORA rate within that month. The same applies to a 3-month compounded home loan package, but it is updated every three months. Therefore, depending on whether you choose a 1-month or 3-month compounded rate, the interest you pay will fluctuate either monthly or quarterly.
Now that we understand what SORA is, let’s look at why you should consider a SORA home loan. But before that, we also need to consider…
Floating Rate vs Fixed Rate Home Loans: Which Should We Choose?
If you are a first-time homeowner purchasing a private property, you must finance your purchase with a bank loan. For existing homeowners, you might be considering refinancing your mortgage, especially if your current loan is pegged to SIBOR.
Regardless of your situation, you can choose from several home loan packages—including floating-rate packages, which is the SORA home loan approach. Between floating-rate and fixed-rate mortgages in Singapore, which should you choose?
The short answer: it depends on the current market outlook and your specific financial situation. If you’re unsure, feel free to consult the mortgage experts at Anjia Lion City!
What Are The Benefits of a Floating Rate Home Loan?
One thing to consider before choosing a floating-rate home loan like SORA is the opportunity for better savings! As interest rates change, there may be periods of falling rates (for example, during an economic recession). If interest rates fall, choosing a floating-rate mortgage can be very advantageous.
However, using a floating-rate home loan also means you need to understand the market’s uncertainty before taking the leap. Therefore, the changing nature of monthly interest rates may only benefit those with a good appetite for risk.
Mortgage rates in Singapore tend to follow global interest rate changes, which include the SORA rate. On December 14, 2022, the US Federal Reserve implemented its seventh rate hike. More rate hikes are expected in 2023, but we estimate these will be less aggressive than the previous year. Nevertheless, it is projected that the US federal funds rate could reach 5.25% to 5.50% by the end of 2023. Correspondingly, mortgage rates for both fixed and floating home loans have been rising.
For now, with rising interest rates, your floating mortgage rate may be much higher than those who chose a fixed-rate mortgage… According to Anjia Lion City’s 2023 forecast for the Singapore property market, loan interest rates may slow down in the second half of the year.
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Why You Should Choose a SORA Mortgage in 2023?
You came here to learn more about SORA home loans, and here are the reasons why you should choose one.
1. SIBOR and SOR are being phased out
As mentioned earlier, SIBOR will be phased out in 2024, and SOR was already phased out in 2021. With the discontinuation of the London Inter-Bank Offered Rate (LIBOR), SOR will officially cease to be used after June 30, 2023. When these benchmark rates are no longer in use, what happens if your home loan is tied to them?
First, the bank will offer you another floating-rate package (e.g., a SORA home loan), and you may have to comply with the prevailing fees and terms (i.e., a longer lock-in period than you might wish for). Alternatively, you may need to find another home loan to finance your property.
Either way, you don’t want to be in a situation where you have to rush to find a loan solution. This could lead to you getting a new loan with rates that are not favorable to your financial situation or plans.
Furthermore, when a benchmark rate is phased out, you might get bogged down in professional paperwork (we’re already starting to worry about all the paperwork you’ll have to deal with). It is advisable to opt for a SORA home loan when you have the chance, rather than being forced to choose one out of necessity.
2. SORA home loans can offer more opportunities to save money
For mortgage portfolios where the interest rate is based on a compounded rate (i.e., SORA home loans), changes tend to be more gradual and less volatile.
The 3-month compounded SORA reached 3.0937% on December 14, 2022, up from 0.1949% on January 4, 2022 (which was the first SORA publication date of last year). In comparison, the 3-month compounded SIBOR was 4.25179% on December 7, 2022, whereas it was only 0.437% on January 3, 2022.
For existing homeowners with a SIBOR home loan, considering the bank’s spread, your net loan rate may have exceeded 4.5%, which could put you under financial strain.
3. SORA is a more transparent and robust loan benchmark
SORA is administered by the Monetary Authority of Singapore (MAS), while SIBOR is estimated by The Association of Banks in Singapore (ABS Co.), which currently consists of 17 participating banks.
SORA is a backward-looking rate because it uses the average rate of actual interbank lending transactions that occurred on the previous day. Meanwhile, SIBOR is a forward-looking rate because it considers the rates at which major banks intend to borrow.
This means SIBOR may not accurately reflect the actual expectations of all banks in Singapore; SIBOR takes an average of several banks, ignoring the lower and higher percentiles/values.
Furthermore, unlike SIBOR, SORA does not depend on international interest rates. This makes SORA more stable and accurate compared to SIBOR. Therefore, SORA is more transparent and serves as a unified benchmark that borrowers can use to easily compare various loan packages.
SORA Home Loans in Singapore
Depending on the market outlook and your personal financial situation, a SORA home loan might be suitable for you.
Some banks that offer SORA home loans include DBS Bank (DBS), OCBC Bank (OCBC), UOB Bank (UOB), Citibank, HSBC, Maybank, Standard Chartered Bank, and RHB Bank. The loan packages offered by each bank vary. You can consult with a mortgage expert at Anjia Lion City to help you obtain different mortgage packages and the latest interest rates from major banks.
For detailed information on the latest loan packages and rates, please contact a mortgage advisor at Anjia Lion City. They can also provide you with tailored financial advice for free!
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