SORA vs Fixed vs SIBOR in Singapore: 5 Questions to Ask!

If you are currently repaying a home loan interest rate pegged to the Singapore Interbank Offered Rate (SIBOR), you might be thinking about how the transition to a Singapore Overnight Rate Average (SORA) pegged home loan will impact you. We will uncover to main points to consider when deciding between a SORA and SIBOR home loan as well as a fixed-rate home loan.

Comparing SORA or SIBOR home loans

A SORA rate is based on the volume-rated average rate of all overnight recorded interbank transactions in the SGD cash market in Singapore. It is entirely derived from data and requires no expert judgement, so there is less subjectivity and is more straightforward for the general public to understand.

This is in stark contrast to the SIBOR benchmark, which is based on the interest rate banks charge to other banks borrowing unsecured funds on the Singapore interbank market. It is derived by averaging the bank rates of not more than 10 banks out of a possible pool of 20, which is why the process for each bank to determine its declared borrowing is less transparent as compared to SORA.

With volatility comparable to SIBOR, SORA allows consumers to compare different bank loans more easily and helps banks and financial institutions face fewer risks than when offering diverse financial products referencing different interest rates.

Comparing between a SIBOR and SORA benchmark rate:

TYPE	SIBOR RATE	SORA RATE
1-month	0.302	0.189
3-month	0.437	0.172
6-month	0.593	0.153
12-month	–	–

Updated Jan 2022

Please note that until SIBOR gets discontinued, it is still a viable option to remain on if you have a SIBOR package due to the lower bank spreads compared to a SORA home loan package.

Why is SORA replacing SIBOR?

The proposed shift to a single rate SORA benchmark evaluated that rather than transitioning both Swap Offer Rate (SOR) and SIBOR benchmarks, it would be advantageous in the long run for SGD financial markets to move to a SORA-centred interest rate benchmark.

A SORA-centred approach will improve the integrity and robustness of SGD financial benchmarks. SORA-pegged home loans will not only profit the customers, but also the banks and financial institutions. The reason being SORA will steer clear market fragmentation, aid pricing transparency and trouble-free assessment of loans while promoting the expansion of a deeper and efficient financial market.

The backwards-looking compounded SORA overnight rates are considered more stable than forward-looking term SIBOR rates, which are commonly used for floating-rate home loan packages in Singapore

In addition, computation of SORA is based on banks’ transactions – this translates to no expert judgement required. This makes SORA look more sustainable compared to SIBOR.

Some major banks have already started rolling out SORA home loans in addition to their SIBOR-pegged home loans, with the 3-month SORA floating home loan rates being the most common one.

However, the options to choose are relatively less as compared to SIBOR. Surely, you will start seeing better SORA-pegged home loan deals in time to come, but this will happen gradually.

1. What is the immediate impact on my current SIBOR-pegged home loan?

If you currently have a SIBOR floating-rate mortgage loan, you do not need to be worried or take any action in haste. Banks and financial institutions will eventually convert their prevailing SIBOR packages into SORA ones in the coming three years or so, just like they did with SOR home loan packages in the past.

The new timeline will have no instant impact on prevailing SIBOR rate home loans.

Banks will contact their customers in due time and provide adequate notice for them to consider switching their housing bank loans to other alternative loan packages with pricing options.

2. When will I be forced to change my SIBOR home loan to a SORA home loan?

Once SIBOR is discontinued, your bank or any financial institution will no longer be able to compute or determine your interest payment using the SIBOR benchmark. As such, you must replace your property loan referencing SIBOR by the end of 2024.

Just keep in mind that we are still in the initial stages of SORA mortgages. It would not be a bad idea to hover around a bit until the competition among banks heats up.

However, if you do not like your current SIBOR home loan package for a reason and are already looking to switch to a SORA-pegged loan, you can do so!

3. What are my options if I’m currently on a SIBOR-pegged mortgage loan?

IIn a persistently low-interest-rate environment like right now, it is best to remain pegged to a SIBOR mortgage loan. The SIBOR rates have continued to remain low – the lowest in the past seven years!

One should simply wait to hear from the bank about the revised benchmark and the option to consider switching to an alternative loan package or refinance the mortgage for lower interest rates at that point in time.

4. Do you think it’s wise to refinance to a SORA-pegged home loan now?

While a SORA pegged home loan does offer new possibilities for homeowners, let us not be too quick to discount SIBOR.

Let us understand this with an example.

For example, if the bank spread on your current SIBOR mortgage loan is below 0.40%, then your total housing loan interest rate comes up to 0.70% to 0.83% (with a SIBOR rate ranging between 0.30% and 0.43%).

In this case, it does not make sense to refinance to a SORA home loan as the lowest SORA rate packages offered by banks generally start from 0.86% and onwards.

Sora Home Loan Refinancing Rates

BANK	LOAN TYPE	Year 1
Limited Promo*	3-month SORA	0.80%
Limited Promo*	1-month SORA	0.81%
DBS	3-month SORA	0.96%
HSBC	1-month SORA	0.86%
Citibank	1-month SORA	0.89%
Standard Chartered	3-month SORA	0.86%
OCBC	1-month SORA	0.96%

With the costs of refinancing (such as possible penalties and upfront costs), it does not make sense to refinance your loan to a SORA-pegged home loan right now. If you cannot justify your savings after refinancing, you might want to wait for better SORA mortgage deals to come.

Whether to stick to a SIBOR mortgage or refinance to a SORA-pegged home loan package, your decision should depend on the bank spread rate offered by the bank on your current loan.

For example, a SIBOR loan package usually looks something like this: 3M SIBOR + 0.4%. 3M SIBOR is the number of months in which the interest rate changes and 0.4% is the spread a bank charges.

Always compare to find out which bank has the best housing loan option with the lowest possible spread. It is also a good idea to also look at the “fourth year and thereafter” rates on your current package when comparing SORA rate packages (unless you refinance again, but that comes with its additional costs).

With time, you can surely expect better SORA home loan packages coming your way. It is always good to consult an experienced mortgage broker in Singapore before jumping to any decision.

5. Should I switch from SIBOR to a Fixed Rate home loan instead of SORA?

While SIBOR home loans may introduce more volatility over the stability of a fixed-rate home loan, they still make a better choice for homeowners for their lower monthly payments when interest rates do fall. However, this also means that there is a risk of incurring slightly higher interest rates if the interest rates move upwards.

Nevertheless, such an occurrence of sudden interest rate hikes is unlikely if you understand the macro-economic environment. However, you should be mindful that SORA rates are refreshed daily and are fairly similar compared to a SIBOR benchmark rate, which is also set every day by the Association of Banks in Singapore.

FFor a fixed-rate home loan, once the lock-in period is over, all fixed-rate home loans in Singapore eventually convert into floating-rate home loans. The differentiating point is the type of floating rates it will switch to and the pros and cons of that specific interest rate type.

However, you may think of choosing fixed-rate mortgage loans in a rising interest-rate environment where you are expecting the interest rates in floating-rate home loans to rise over the next two to three years.

Fixed-home loan rates will not change, which allows you to pay lower interest on your mortgage in an increasing interest-rate environment. However, when the interest rates fall, fixed-rate home loans will leave you at a disadvantage.

Also, fixed-rate home loans are often pegged at a higher interest rate than other housing loan packages, like SIBOR or SORA. You may associate fixed rates with the borrower’s peace of mind, but the key point to consider is how much of a premium is attached to a fixed-rate home loan vs a SORA rate.

For example, if the total interest rate on a SORA home loan is currently at 0.80% and the lowest 2-year fixed rate is at 1.05%, then the difference of 0.25% on a 500k loan size comes up to nearly $100 per month.

So essentially, if you feel paying an additional $100 per month on a fixed rate beats the stress of an increasing interest-rate environment then, a fixed rate over a SORA home loan is the better option to go for.

Therefore, taking into account that ‘right now’ is the lowest interest-rate environment since the financial crisis back in 2008 and the forecasts by the Monetary Authority of Singapore suggest the potential rise in our mortgage rates in 2022, it is up to the homeowners to decide how much of a monthly premium is comfortable for them to have the stability and peace of mind with the lowest fixed rates in over a decade.

Dollarback Mortgage Recommendation

Although the full phasing out of SIBOR home loans will only be completed by the end of 2024, it is wise to keep an eye on the changing economy in Singapore and start planning if you should refinance your housing loan now.

Banks and financial institutions are witnessing growth in refinancing volumes from property owners whose lock-in periods started around 2018 and 2019. Choosing a fixed-rate home loan right now with a 2-year lock-in period can put property owners in a good position to refinance yet again in 2023/2024, just when interest rates are projected to rise.

If you are still confused about which benchmark housing loan rate will benefit you the most in the long run, fret not. DollarBack Mortgage has a team of the best home loan experts that can provide you with the best recommendation for a benchmark home loan rate that will give you the most bang for your buck.