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Home Loan Interest Rates

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

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In a keynote speech, Mr Leong Sing Chiong, Deputy Managing Director of Markets and 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 Swap Offer Rate (SOR) and Singapore Interbank Offered Rate (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 the future.


The latest updates on the transition 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.

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.

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.

When will SOR be discontinued?

Once a key reference rate and alternative to SIBOR, SOR has been completely phased out and replaced with SORA for its relatively high volatility. 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 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 relies on LIBOR for its computational methodology, the LIBOR discontinuation will naturally 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.

Is SIBOR being phased out?

Yes, as per the latest update, it has been affirmed that SIBOR will be gradually phased out; the long-term 6-month SIBOR on 31 March 2022 followed by the more widely-used 1-month and 3-month SIBOR rates by the end of 2024.

Going forward, SORA will be used as the key interest rate benchmark in Singapore dollar financial instruments.

When is SIBOR likely to be discontinued?

As per the recommendation in the consultation report, all financial institutions and their consumers should discontinue the 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.

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 2023?

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.

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 in the long run but with mortgage rates going down in 2023, SORA home loans with low bank spreads present the best interest savings opportunity.

It is always better to look into the totality of the home loan packages offered by banks in order to figure out which best cater to your financial needs.

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

Though SORA is new, most of the banks have already launched SORA-pegged home loans. As banks start to explore new housing 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:

BankInterest Rate Type1st Year Interest Rate
SCB3M SORA3m SORA + 0.65%
Maybank3M SORA3m SORA + 0.70%
DBS3M SORA3m SORA + 0.75%
UOB3M SORA3m SORA + 0.80%
CIMB3M SORA3m SORA + 0.80%
Citibank3M SORA3m SORA + 0.80%
Bank of China3M SORA3m SORA + 0.80%
HSBC1M SORA1m SORA + 0.65%
Citibank1M SORA1m SORA + 0.73%
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. Banks are expected to pilot more new SORA products in 2022.

DollarBack Mortgage is a one-stop for comparing the best banks for housing loan packages in Singapore and helping you sieve through to make the best decision and save dollars.

With us, you get a chance to tap into our expert network of home loan specialists and mortgage bankers with additional vouchers and cashback.

In order to give you the best advice, based on your financial situation, we work hard to stay on top of all the latest mortgage home loan news in Singapore so that you can get the best home loan package.

Get in touch with one of DollarBack Mortgage consultants who can help you find out 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 home loans.

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