In recent times, one of the most pressing questions on the minds of financial analysts, business owners, and homeowners in Singapore has been the trajectory of the Singapore Overnight Rate Average (SORA). As we usher in 2024, the speculation around whether SORA rates will continue their upward climb remains a topic of intense debate and analysis.
SORA, a key benchmark interest rate that influences a wide range of financial products and services, from home loans to corporate financing, has seen notable fluctuations in the past. Considering the aggressive back-to-back rate hikes by the US Federal Reserve, Singaporean borrowers looking to take up a mortgage bank loan in 2024 are asking themselves “Will the SORA rate continue to increase”?
This blog post aims to delve into the complexities and driving factors behind SORA’s movements, offering insights into the economic indicators, policy decisions, and global financial trends that could shape the course of SORA rates in 2024.
The US Fed controls the interest rate at which US banks and other financial institutions borrow money. The Fed aims to promote maximum employment and stable prices to keep inflation in check and stop the US economy and other affected economies from plunging into another recession.
The continuous hikes in interest rates (federal fund rates) are basically an attempt to adjust the cost of borrowing to fight against red-hot inflation.
But how do increased interest rates bring down inflation? Well, the theory is that rising rates will result in a higher cost of borrowing, which ultimately leads to a fall in demand for goods and services. As the demand goes down, inflation will eventually tumble as well.
However, higher interest rates could also result in increased home loan rates, lay-offs, pay cuts, and a negative impact on stock prices in Singapore.
But thankfully, not everything is doom and gloom. With higher interest rates, banks will increase interest rates on savings accounts and fixed deposits along with other Singapore Government Securities (SGS) like SGS bonds, Singapore Savings Bond (SSB), and Treasury Bills (T-Bills).
As Singapore’s benchmark interest rates, including SIBOR and SORA, are closely intertwined with the global interest rate trends, a hike in the US Fed interest rates often leads to an increase in these benchmark rates.
In 2023, the 3M SORA has shown a trend of gradual increase, although it began to stabilize towards the end of the year. Starting from 0.194% at the beginning of 2022, it rose to 3.029% in January 2023 and experienced a modest uptick throughout the year, reaching 3.746% by December 2023.
This stabilization in the latter part of the year coincides with the US Federal Reserve’s decision to pause rate hikes after July 2023.
For those with floating home loans in Singapore, this trend suggests a potential easing of the upward pressure on interest rates. While the 3M SORA has increased significantly compared to its level at the start of 2022, the rate of increase has slowed considerably, indicating a plateauing effect.
Looking ahead to 2024, it is expected that the 3M SORA will maintain a steady level, with no significant increases anticipated. This outlook is based on the expectation that the US Fed’s interest rates might decrease less than what is currently forecasted by the market. Nevertheless, even modest improvements in mortgage rates could offer some relief to homeowners and potential buyers in Singapore.
It’s important to note that while the peak of inflation rates may have passed, the US Fed still aims to achieve its 2% inflation target, which could influence global interest rates, including SORA. Therefore, while a significant decrease in SORA is not expected, its recent trend towards stabilization offers a more predictable environment for borrowers in Singapore.
In Singapore, the landscape of floating home loan packages is primarily influenced by two benchmarks: SORA and SIBOR (Singapore Interbank Offered Rate). While both are interbank rate benchmarks, they exhibit different characteristics and trends, particularly in their response to the US Federal Reserve’s federal funds rates.
SIBOR, which is highly correlated with the US Fed’s rates, is determined based on the estimated costs for a bank to borrow SGD from another bank. In contrast, SORA represents the average rate of actual overnight transactions in the SGD interbank market.
This fundamental difference in calculation leads to distinct movement patterns for these two rates. SIBOR tends to be more volatile as it is forward-looking and based on daily estimates, while SORA, being backward-looking and based on actual transactions over a period, generally exhibits less volatility.
As of 11 December 2020, the Association of Banks in Singapore (ABS) announced the phase-out of SIBOR home loans, setting a path towards a transition to SORA. This move reflects a global trend of shifting towards more transaction-based benchmark rates.
Consequently, homeowners currently on SIBOR-linked home loans have until 30 April 2024 to review their loan packages and make informed refinancing decisions. From 1 June 2024, these loans will be automatically converted to the SORA Conversion Package (SCP).
For homeowners, this transition period is crucial for evaluating their options. While SORA-based loans are increasingly popular due to their stability and predictability, they are not the sole option in the market. Borrowers should consider their financial situations, interest rate trends, and market projections to determine the most suitable home loan choice as the shift from SIBOR to SORA progresses.
The trajectory of the SORA rate in 2024 is likely influenced by several key economic factors, including decisions made by the US Federal Reserve and the Monetary Authority of Singapore (MAS).
The SORA rate, integral to determining borrowing costs in Singapore, often moves in tandem with the US Fed fund rate. Thus, any Fed rate cuts in 2024 would likely lead to a corresponding decrease in SORA rates. This connection is crucial as it directly impacts the cost of borrowing for households and businesses in Singapore.
Given the current state of inflation in Singapore, which appears to be under control, the MAS might consider lowering SORA rates. This move would aim to strike a balance between maintaining a check on inflation and fostering economic growth. A reduction in SORA rates can have a noticeable impact on households and the broader economy:
Refinancing of Loans: Lower SORA rates could present a favourable opportunity for households to refinance home loans. By locking in lower interest rates, there could be substantial savings over the lifespan of these loans.
Home Loans and Borrowing Costs: If SORA rates fall, home loans pegged to this benchmark would likely see a decrease in interest payments. This reduction could increase disposable income for homeowners, making borrowing more affordable.
Impact on Savings and Investments: On the flip side, a decrease in SORA rates might result in lower interest earnings for savings accounts, fixed deposits, and bonds. This aspect is important for households that rely on such instruments for income or savings growth.
In summary, a potential decrease in SORA rates in 2024 could provide financial relief for borrowers in Singapore, particularly those with home loans pegged to SORA. However, it’s also important for savers and investors to be mindful of the impact on their returns. As always, economic forecasts are subject to change based on global and local economic conditions.
As homeowners in Singapore consider switching to SORA-pegged home loans in 2024, it’s essential to understand the nuances of this decision, particularly since these loans are typically tied to the 3-month compounded SORA, reflecting the average cost of borrowing overnight funds in SGD. Here are key considerations for those contemplating a SORA-pegged home loan:
If you secure a 3M SORA home loan when rates are high, be prepared for initially higher mortgage payments. It’s crucial to have a financial buffer to manage these payments without overstretching your regular budget.
The SORA rate can vary, so it’s important to factor in potential changes, especially if starting rates are high. Utilize mortgage calculators to estimate payments at different interest rates, ensuring you can comfortably cover these with your financial cushion.
If higher loan repayments weren’t initially factored into your budget, explore refinancing options. As rates decrease later in 2024, you might be able to reduce reliance on your financial cushion, but it’s still prudent to maintain it for other emergencies or future rate hikes.
Be mindful of the lock-in period of your SORA home loan, during which refinancing could incur penalties. This is important as it may limit your ability to benefit from future lower rates.
Weigh the potential penalties for early refinancing against the benefits of securing lower rates later on. High penalties can sometimes negate the advantages of lower interest rates.
In a volatile interest rate environment, the shorter the lock-in period, the better. This flexibility allows you to adapt to changing rates without being penalized, especially crucial for floating rate loans where the interest comprises a fixed bank spread plus the fluctuating SORA rate.
If we go by the historical trend, the interest rate cycle shows that when the US Fed eventually cuts the Fed funds rate by 1% (or more), like back in 2019, it will not be surprising to see the 3-month compounded SORA crashing all the way back to 1.50%.
With most banks, you have to pay a penalty of 1.5% on the outstanding loan amount if you want to pay off your home loan early, i.e., within the lock-in period. However, it is not so with every bank. Some banks waive off the early repayment penalties during the lock-in period or allow partial prepayment without getting penalised, thus mitigating the effect of rising interest rates.
So when looking for a 3M SORA home loan package, you must check if it allows you to sell the property during the lock-in period along or the option of making partial repayments without a penalty.
When choosing a home loan, it’s crucial to consider more than just enticing low introductory rates. Often, these rates increase significantly after the initial period. Therefore, evaluating the total cost over the loan’s lifespan, including potential rate hikes and additional fees, is essential.
A comprehensive analysis that accounts for all terms and conditions will provide a more accurate picture of long-term financial implications, ensuring a choice that aligns with your overall financial goals and circumstances.
Let’s understand it with an example.
|3M SORA + 0.60%
|3M SORA + 0.60%
|Year 3 onwards
|3M SORA + 1.00%
|3M SORA + 0.60%
|3M SORA + 0.60%
|3M SORA + 0.60%
|Year 4 onwards
|3M SORA + 1.00%
Note that the 3M SORA rate for both options would be the same, so the distinguishing factor here would be the bank spread (also called the home loan spread).
Assuming the 3M SORA rates to be 3.5%, it shows that a lower bank spread rate for the longer term (Option 2) is better for flexibility and to maximise your interest savings without needing to explore home loan refinancing too early or frequently.
By carefully evaluating these factors, you can make a more informed decision about taking a 3M SORA home loan in 2024, especially in the context of expected decreasing rates.
Depending on your current financial situation and market expectations, a SORA housing loan might be the right choice for you. Some Singapore banks offering SORA mortgage packages include DBS, CIMB, Citibank, OCBC, UOB, Maybank, HSBC, and Standard Chartered Bank (SCB).
Have a look at our detailed comparison of which banks offer the best 3-month SORA floating rate home loan packages for HDB, private properties and home loan refinancing in Singapore.
As mortgage advisors, our recommendation is to consider short-term fixed-rate home loans in the near term, especially with the likelihood of declining US interest rates in 2024. This approach provides stability against immediate rate fluctuations.
Subsequently, transitioning to SORA-linked floating rate home loans in the following year could be beneficial as these rates are expected to adjust favourably. We also anticipate a surge in refinancing activity once the Fed implements rate cuts in 2024, as homeowners currently facing higher mortgage rates will likely seize the opportunity to reduce their monthly expenses.
While inflation and rising interest rates are things beyond our control, you should act more prudent and plan your finances before taking a SORA home loan. One should always consider the worst-case scenario and ensure they have enough savings for a rainy day.
Understand that low promotional interest rates may look attractive from the top but may not be what you need. Choosing a SORA home loan package only by calculating the costs in the first year could be a big financial mistake you can avoid. Do the maths and calculate the overall costs over the lifespan of the lock in period and any penalties involved before making a decision.
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