In a keynote speech, Mr Leong Sing Chiong, deputy managing director (markets & development) at the Monetary Authority of Singapore (MAS) announced that Singapore will press ahead with its industry transition to the Singapore Overnight Rate Average (SORA) as the new interest rate benchmark for SGD financial markets by the end of 2021.
In simpler words, these interest rate benchmarks are used by banks to determine how much interest rate to charge the borrower or to payout. Banks use this interest rate benchmark and apply a “spread”. SORA is the latest addition to the list of Singapore interest rate benchmarks and has been recommended to replace SOR and SIBOR.
Since these interest rate benchmarks fluctuate on a day-to-day basis, your home loan interest rates will also constantly change. This makes keeping a tab on the interest rate benchmarks so important, especially for those looking to get a mortgage loan in future.
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 Singapore Interbank Offered Rate (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 and was used to replace the SOR pegged mortgage loans.
Administered by the Monetary Authority of Singapore (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 IOSCO (International Organisation of Securities Commissions) 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.
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 authorized transactions for a particular business day, which is then put out on the MAS website as SORA rate by 9 am, 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.
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 3 months.
For eg, for a 3M compounded SORA rate on the 25th of Dec 2021, the previous daily SORA rates from 25th Sept 2021 onwards is compounded over the next 3 months.
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 1 month.
For eg, for a 1M compounded SORA rate on the 5th of Jan 2022, the previous daily SORA rates from 5th of Dec 2021 onwards is compounded over the next 1 month.
Considering if a 1M SORA or 3M SORA is better, involves various factors but most importantly would be looking at key economic indicators in Singapore.
Inflation rates (CPI or PPI indexes), unemployment levels and the SGD dollar value together provide a good indication of how the SORA rate might fluctuate and therefore, deciding between a 1M or 3M SORA rate much easier.
In an increasing interest rate environment, to prevent the cost of borrowing 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 for the interest rate on a 1M SORA loan to decrease faster than a 3M SORA loan.
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, which 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 of 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 and didn’t 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 wouldn’t 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 more beneficial instead of implementing two transitions of interest rate benchmarks separately for SOR and SIBOR.
The use of SORA-centred approach will improve liquidity while better positioning the SGD financial markets for the future.
The SIBOR transition to SORA will also help 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 to gain from greater transparency, and a deeper and 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.
Once a key reference rate and alternative to SIBOR, SOR has been completely phased out and replaced with SORA for its high volatility as compared to SIBOR. 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.
As per the latest update, SOR is expected to discontinue in mid-2023. The transition of SOR to SORA was necessary as FCA (Financial Conduct Authority) announced the likely discontinuation of USD LIBOR in mid-2023 (earlier: after end-2021).
SOR relies on LIBOR for its computational methodology and thus the LIBOR discontinuation will directly affect the continuity of SOR.
According to the latest SC-STS report, all financial institutions and their consumers should terminate usage of SOR in new derivative contracts by mid-September 2021. However, SOR could be utilised for specified purposes related to the transition and risk management of legacy SOR arrangements to SORA for now.
Yes, as per the latest update, it has been affirmed that SIBOR will be gradually phased out; the long-term 6-mth SIBOR on 31 March 2022 followed by the more widely-used 1-mth and 3-mth SIBOR rates by the end of 2024.
Going forward, SORA will be used as the key interest rate benchmarked in Singapore dollar financial instruments.
As per the recommendation in the consultation report, all financial institutions and their consumers should discontinue usage of SIBOR-linked financial products in new contracts by mid-September 2021.
Many banks have already started launching SORA packages alongside SIBOR home loans. This will help in educating customers on the new benchmark rate, how it operates and how it impacts them.
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 rate 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’s 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 loan that have already been carried out.
For this reason, the predictability of a 3-mth 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 the unexpected interest rate spikes as banks (or other financial institutions) can increase interest rates with no prior warning, and hence the unpredictability.
The industry groups behind the report had recommended SORA due to the following reasons:
In a recent survey, 6 in 10 property loan customers say that they like the comparative stability of SORA-pegged home loans. That being said, homebuyers should be in no hurry to jump onto the SORA bandwagon. Better deals will surely spring in time to come.
Being a forward-looking interest rate benchmark, SIBOR home loan can work in favour of homebuyers in a low interest rate environment. SIBOR would allow you to capture declining interest rates very quickly, unlike SORA, and it doesn’t come with the 60 to 90-day averaging associated with SORA rates.
With limited practical historical trends of a SORA rate , it is still uncertain to say if the effective cost of borrowing a SORA-pegged home loan will be cheaper than a SIBOR home loan. The interest rate on your home mortgage loan will also depend on the spread imposed by the bank.
It is always better to look into the totality of the home loan packages offered by banks in order to figure out which ones best cater to your financial needs.
Though SORA is new, most of the banks have already launched SORA-pegged home loans. As banks start to explore new home loan options pegged to SORA, homebuyers can expect more home loan choices in the coming years.
Banks offering the best SORA home loan in Singapore:
|Bank||Interest Rate Type||1st Year Interest Rate|
|SCB||3M SORA||3m SORA + 0.65%|
|Maybank||3M SORA||3m SORA + 0.70%|
|DBS||3M SORA||3m SORA + 0.75%|
|UOB||3M SORA||3m SORA + 0.80%|
|CIMB||3M SORA||3m SORA + 0.80%|
|Citibank||3M SORA||3m SORA + 0.80%|
|Bank of China||3M SORA||3m SORA + 0.80%|
|HSBC||1M SORA||1m SORA + 0.65%|
|Citibank||1M SORA||1m SORA + 0.73%|
|OCBC||1M SORA||1m SORA + 0.65%|
As you can see, the most common versions of home loan packages offered right now are 3M SORA floating home loan rates, which means your interest rates will only refresh every 3 months. Banks are expected to pilot more new SORA products in 2022.
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Get in touch with one of DollarBack Mortgage consultants who can help you find about how these changes will affect your current situation and choose a home loan package accordingly by comparing various floating rates, be it SORA, SIBOR, board rate or fixed rate loans.
Fixed mortgage rate home loans in Singapore are always a consideration but be aware of the shortfalls.
If you are currently on a SIBOR rate and thinking about changing to a SORA home loan in Singapore, here are 5 questions to ask!
Understand what is a SORA rate, why it was introduced and if a 3M SORA or 1M SORA is better.