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What is a SORA rate and is 3M SORA vs 1M SORA better?

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In a keynote speech in 2021, the Monetary Authority of Singapore (MAS) announced that Singapore Overnight Rate Average (SORA) will now be the main interest rate benchmark in Singapore financial markets.

In line with global interest rate benchmark reform, Singapore has moved towards SORA, as the two legacy interest rate benchmarks – the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR) – are both being phased out. Since then, banks in Singapore have begun the process of converting all existing SOR-based and SIBOR-based property loans.

Understanding interest rate benchmarks is crucial for making informed decisions, especially when it comes to home loans. When choosing a SORA-pegged loan, a key consideration is whether to opt for a 1-month SORA (1M SORA) or a 3-month SORA (3M SORA). Both have unique implications on how interest rates on your home loan are calculated and can significantly impact your financial planning.

This article aims to demystify these concepts, helping you understand what SORA is, the nuances of 1M SORA versus 3M SORA, and how is it different and better than SIBOR, to determine which might be better suited for your needs.

Contents:

Transition from SIBOR to SORA: What you need to know

In July 2020, a consultation report by three major financial industry groups – the Association of Banks in Singapore (ABS), the Singapore Foreign Exchange Market Committee (SFEMC) and the Steering Committee for SOR Transition to SORA (SC-STS) – recommended the discontinuation of the SGD SIBOR, which is currently the most popular floating rate benchmark for home loans in Singapore.

SIBOR is pegged to interest rates banks charge to other banks wanting to borrow money on the Singapore interbank market. It was used to replace the SOR pegged mortgage loans.

The 6-month SIBOR rate has been discontinued since 31 March, 2022. The more widely used 1-month and 3-month SIBOR rates are set to be phased out by 31 December, 2024.  It is interesting to note that banks have not been issuing new SIBOR-pegged loans since October 2021.

To facilitate this SIBOR transition to SORA, borrowers currently on SIBOR-based home loans are encouraged to be proactive during the period from 1 September, 2023 to 30 April, 2024. This window is designated for borrowers to consider switching to a SORA-pegged loan or explore other prevailing home loan packages offered by their respective banks.

Notably, after this transition period, banks will automatically convert existing loans to the SORA Conversion Package (SCP) at the historical median spread from 1 June to 30 June, 2024. This strategic move, approximately six months before the scheduled end of SIBOR at the close of 2024, aims to streamline the adjustment process for borrowers.

According to the ABS, close to two-thirds of homeowners with SIBOR-based home loans are yet to switch to SORA.

What is a SORA rate?

Administered by the MAS, the newly introduced SORA is the “most robust and suitable alternative” interest rate benchmark, underpinned by a deep and liquid overnight interbank funding market.

SORA as a financial benchmark meets the international best practice standards set out in the International Organisation of Securities Commissions (IOSCO) Principles for Financial Benchmarks, thus generating broader market confidence by both domestic and international market participants.

In contrast to SIBOR’s intricate system of ranking banks and then eliminating the quartiles from the top and bottom, the process of computing SORA is much simpler.

How is SORA calculated?

SORA is determined using a volume-weighted approach wherein the average rate of all actual transactions traded and booked in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6:15 pm. The phrase “volume-weighted” simply means that the calculations consider the actual amount being lent.

MAS performs in-depth data validation checks and calculates the volume-weighted average rate of all authorised transactions for a particular business day. These calculations are then put out on the MAS website as SORA rate by 9 a.m, on the following business day.

MAS periodically reviews SORA’s calculation methodology along with the management processes to ensure they line up with the IOSCO Principles and capture the underlying interest rate effectively.

What does a 3M compounded SORA rate mean?

A 3M compounded SORA rate is based on a compounding period of 3 months of the historical SORA rate which is published daily on the MAS website.

The refresh period or how often this 3M SORA rate changes corresponds to the compounding period, which is three months.

For e.g., for a 3M compounded SORA rate on the 25th of December 2021, the previous daily SORA rate from 25th September 2021 onwards is compounded over the next three months.

What does a 1M compounded SORA rate mean?

A 1M compounded SORA rate is based on a compounding period of 1 month of the historical SORA rate which is published daily on the MAS website.

The refresh period or how often this 1M SORA rate changes corresponds to the compounding period, which is one month.

For e.g., for a 1M compounded SORA rate on the 5th of January 2022, the previous daily SORA rates from 5th of December 2021 onwards is compounded over the next month.

Is a 1M or 3M SORA rate better?

To determine whether a 1M SORA or 3M SORA is better, you will need to consider various factors, the most important being the key economic indicators in Singapore.

Inflation rates (CPI or PPI indexes), unemployment levels and the SGD dollar value provide a good indication of how the SORA rate might fluctuate and therefore, making deciding between a 1M or 3M SORA rate much easier.

As inflation increases, a SORA rate will continue to increase and to prevent the cost of borrowing from rising too quickly, a 3M SORA rate would be the preferred option since it has a longer refresh period of 3 months compared to a 1M SORA of 1 month.

The converse holds in a decreasing interest-rate environment where a 1M SORA would be preferred due to a shorter interest refresh period. This allows the interest rate on a 1M SORA loan to decrease faster than a 3M SORA loan.

Note that when SORA is trending up, if your housing loan is pegged to 1MSORA, you will find your housing loan rate moving up earlier as compared to mortgage loan pegged to 3MSORA. When SORA shows an upward trend, and your housing loan is linked to 1M SORA, you’ll notice an earlier increase in your loan rates compared to loans that are tied to 3M SORA

Why is SORA replacing SOR and SIBOR?

The planning to reform SIBOR to a new benchmark rate started in the last month of 2017. After the 2008-2009 global financial crisis, certain regulatory changes were enforced on banks. This eventually resulted in the decline in the importance of the practice of banks lending or borrowing from each other as a source of funding.

In July 2020, the same team that initiated SIBOR’s reform in 2017 proposed a novel waterfall methodology that incorporated corporate deposit transactions as part of the design of SIBOR’s successor. However, this methodology still counted on the use of expert judgement by the banks, although to a lesser degree.

Unfortunately, a year-long testing (July 2019 to June 2020) revealed that this alleged new benchmark, although relatively robust, was more volatile than the SIBOR rate. Moreover, it did not track the movements in SIBOR as closely as expected. The new benchmark rate’s high volatility makes it more intricate for acceptance by the end-user.

Henceforth, the team suggested that replacing SIBOR directly with the new polled benchmark in existing SIBOR contracts would not be possible and would require extensive amendments to existing financial contracts. The report deemed the process to be highly resource-intensive and much more complicated.

Given the steady transition from SOR to SORA in the derivatives market, the team assessed moving SGD financial markets to a single rate regime focused on SORA as it was deemed to be more beneficial than implementing two transitions of interest rate benchmarks for SOR and SIBOR, respectively.

The use of a SORA-centred approach will improve liquidity while simultaneously achieve a better positioning for the SGD financial markets for the future.

The SIBOR transition to SORA will also help participants reap the expected benefits of enhanced market efficiency in a SORA-centred interest rate benchmark regime.

The retail consumers, SMEs and other users of SGD floating-rate products currently referencing SIBOR can expect to gain from greater transparency and a deeper, more competent market.

SC-STS is committed to developing SORA-based solutions and products that will not only meet the needs of all users, but also ensure a smooth and well-managed transition for current SIBOR users.

Is SIBOR & SOR being discontinued?

As per the SC-STS’s recommendations in the July 2020 consultation report, all financial institutions and their consumers should discontinue the usage of SIBOR-linked financial products in new contracts by mid-September 2021.

Since then, many banks started launching their SORA packages alongside SIBOR home loans. This transition period helped in educating customers on this new benchmark rate, how it operates, and how it impacts them.

Once a key reference rate and alternative to SIBOR, SOR has also been phased out since 30 June 2023. People who previously had SOR-pegged home loans have since seen their loans converted to SORA packages. The last SOR-pegged home loan was taken off the market in July 2017.

The transition of SOR to SORA was necessary as the Financial Conduct Authority (FCA) announced the likely discontinuation of the USD London Interbank Offered Rate (LIBOR) in mid-2023 (earlier: after the end of 2021). Since SOR relied on LIBOR for its computational methodology, the LIBOR discontinuation directly affected the continuity of SOR.

What are the key differences between SORA and SIBOR?

SORA is similar to SIBOR as both measure the Singapore interbank lending rate for unsecured loans. However, there are some key differences between the two interest rate benchmarks.

Unlike SIBOR, which is a theoretical rate, SORA is based on actual transactions and does not incorporate “term” or “credit” risk components. This makes SORA less volatile and hence, more transparent.

Also, the interest rates for compounded SORA in arrears can only be known just when the payment period is about to end, while SIBOR rates are known from the start of the payment period.

SORA is likely to be more stable and more predictable as compared to SIBOR.

Let us understand how.

Compounded SORA is a backward-looking overnight rate, which means one can better predict what to expect in the upcoming month by checking the happenings of the past month. It is based on the volume-rated average of all recorded transactions of interbank loans that have already been carried out.

For this reason, the predictability of a 3 month SORA (most likely be used by banks for future home loans) will always be better as it is controlled by SORA rates in the past 90 days.

On the other hand, the forward-looking SIBOR (and SOR) considers the interest rates based on the future estimate of lending rates.

You can be knocked by unexpected interest rate spikes as banks (or other financial institutions) can increase interest rates with no prior warning.

7 benefits of SORA as an interest rate benchmark:

The industry groups behind the report had recommended SORA due to the following reasons:

  1. SORA facilitates more transparency in home loans with volatility comparable to SIBOR.
  2. SORA allows easier comparison of loan pricing and lower risk to banks as different financial products do not have to use different reference rates.
  3. Access to long historical data (published since July 1 2005) allows technical analysis and demonstrates trends for asset-liability pricing, risk management, and trading purposes.
  4. Compounded SORA is significantly more stable when compared to SOR rates, which generally depends on idiosyncratic market elements on a single day.
  5. Computation of SORA is based on banks’ transactions that do not require any expert judgement, making SORA more sustainable.
  6. Use of SORA, particularly in derivatives, is aligned to the new best practices in other key global financial markets.
  7. Availability of SORA-based derivatives will benefit cash market products utilising compounded SORA as the reference rate, such as loans and bonds.

Should I still go with SORA if I am buying a home in 2024?

As you consider whether to choose a SORA-pegged housing loan in 2024, it’s essential to factor in the global economic context, especially the U.S. Federal Reserve’s interest rate trends. Since March 2022, the Fed has raised rates 11 times to combat inflation, but forecasts now suggest a shift.

With interest rates stabilizing in late 2023, the focus for 2024 is shifting from rising mortgage rates to when they might start falling.

Trading Economics predicts a gradual decrease in interest rates to 3.75% in 2024, and further to 3.25% in 2025. Similarly, ING Economics anticipates the Fed beginning to reduce rates in the second quarter of next year, with potential cumulative cuts of 150 basis points across six adjustments, and further reductions into 2025.

Futures markets, as per the CME’s FedWatch Tool, are pricing in a total reduction of 125 basis points for the next year. This adjustment would bring the Fed Funds rate to a range of 4.00%-4.25%, down from the current 5.25%-5.50%. Moreover, Barclay’s and Goldman Sachs also forecast rate cuts by the Fed in 2024, albeit with varying magnitudes.

The median projection from the Fed’s September dot plot chart places the Federal Funds Rate at 5.1% by the end of 2024, indicating just one 25 basis point interest rate cut for all of next year. While precise future trends are uncertain, there’s a consensus among market observers that interest rates will likely decrease somewhat in 2024.

Given that Singapore’s mortgage interest rates, including SORA rates, often align with global trends, potential Fed rate cuts in the coming years could lead to lower floating rate home loan packages in Singapore.

Industry experts suggest considering both fixed rate packages with short lock-in  (one or two years) and SORA-based floating rate options to maintain flexibility and capitalize on potential interest rate changes. Such an approach will balance the need for stability with the opportunity to benefit from expected downward rate trends.

Which banks in Singapore offer 1M SORA and 3M SORA home loans?

As previously mentioned, SIBOR and SOR are being phased out, your bank is going to offer you another floating rate (SORA home loan) package with them.

Banks offering the best SORA home loan in Singapore:

BankInterest Rate Type1st Year Interest Rate
SCB3M SORA3m SORA + 0.45%
Maybank3M SORA3m SORA + 0.50%
DBS3M SORA3m SORA + 0.50%
UOB3M SORA3m SORA + 0.55%
CIMB3M SORA3m SORA + 0.60%
Citibank3M SORA3m SORA + 0.55%
Bank of China3M SORA3m SORA + 0.60%
HSBC1M SORA1m SORA + 0.65%
OCBC1M SORA1m SORA + 0.65%

As you can see, the most common version of home loan packages offered right now is the 3M SORA floating home loan rates, which means your interest rates will only refresh every three months.

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