If you are a homeowner or wish to buy your first home in Singapore this year, you may be affected by higher monthly installments due to the continuous SORA rate increases up to the end of 2023. Amid the aggressive back-to-back rate hikes by the US Federal Reserve, Singaporean borrowers looking to take up a mortgage bank loan are asking themselves “how much higher will the SORA rate increase”?
In Singapore, local banks have been gradually replacing the Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) with Singapore Overnight Rate Average (SORA) as the new benchmark interest rate, according to the guidelines by the Monetary Authority of Singapore (MAS). Please note that SORA has replaced SOR in 2021 and will replace SIBOR by the end of 2024.
To help you get started, let’s talk about what this new benchmark rate, SORA, is and what you should consider for a SORA-pegged home loan in 2023.
A SORA rate, which stands for Singapore Overnight Rate Average simply put is the interest rate that banks in Singapore set on loans lent out to other banks.
SORA fluctuates on a daily basis, which means if you are taking up a SORA-pegged home loan, your loan repayments will change too. However, you can select a home loan package where your interest rate “refreshes” less often for greater stability.
At the moment, borrowers can choose between 1-month compounded SORA and 3-month compounded loan packages as they are most commonly available by banks in Singapore.
Your interest rates are renewed monthly for a 1M compounded SORA package, based on SORA rates compounded within a month. The same goes for a 3M compounded SORA package, but the interest rates are renewed every quarter. We have covered the pros and cons of a 1M SORA vs 3M SORA in a previous article in detail.
The US Fed controls the interest rate at which US banks and other financial institutions borrow money. The continuous hikes in interest rates (Fed fund rates) are basically an attempt to adjust the cost of borrowing to fight against red-hot inflation.
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.
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. 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).
Since the fate of Singapore’s interest rates is closely intertwined with the US interest rates, it is important to know if the US Fed has plans to increase interest rates further. Let’s look at the US Fed funds rate changes observed in 2022 and 2023 up till now.
|Date||Target Fed Funds Rate|
|January 2022||0% – 0.25%|
|March 2022||0.25% – 0.50%|
|May 2022||0.75% – 1.00%|
|June 2022||1.50% – 1.75%|
|July 2022||2.25% – 2.50%|
|September 2022||3.00% – 3.25%|
|November 2022||3.75% – 4.00%|
|December 2022||4.25% – 4.50%|
|February 2023||4.50% – 4.75%|
|March 2023||4.75% – 5.00%|
|May 2023||5.00% – 5.25%|
The above table shows that 2022 saw a series of aggressive interest rate hikes, and the trend continued in 2023. In the current rising interest rate scenario, the interest rates for floating rate home loans might be much higher than those who opted for fixed-rate housing loans.
Those currently servicing a floating rate home loan must have seen an increase in the interest rate and their monthly mortgage payments.
Singapore is a trade-dependent country, and its 3M SORA interest rates are greatly influenced by the global markets, especially the world’s largest US economy. After the latest Federal Open Market Committee (FOMC) meeting in May, the Fed has possibly hinted at the idea that interest rate hikes would pause in Q2 2023.
It means you can expect Singapore’s 3M SORA interest rates increases to be moderate for the short term but eventually maintain a relatively steady level for the mid-term extending to the end of 2023.
The majority of the floating home loan packages in Singapore are pegged to either SORA or SIBOR. SIBOR is highly correlated to the US Fed’s benchmark federal funds rates. Although SORA and SIBOR aren’t the same, they have historically shown similar general trajectories and moved in tandem with the interest rates set by the US Fed as both benchmarks measure the interest rates on the interbank markets.
Therefore, we can clearly say that any hikes in the US Fed funds rate will inevitably affect both SORA and SIBOR benchmark rates. It also means borrowing costs will increase, and those financing their properties with floating mortgage rates in Singapore will likely feel the pinch.
While both rates will increase, SIBOR may see a more drastic change than SORA. SIBOR is a forward-looking term rate and will attempt to predict interest rate movements, thus fluctuating more drastically than SORA.
In contrast, SORA is a backward-looking rate that doesn’t swing unpredictably. Despite the anticipation of an increase in the US Fed funds rate, you will not see SORA going up too high prematurely. In Singapore, the SORA rate will likely increase when there is inflation and go down when there is a recession. It can fluctuate according to other trends, such as changes in political and economic policies.
According to the MAS, the SORA rate has increased year-to-date by almost 55% from the start of 2023.
Since the SORA rate follows the US interest rate hike, Singapore households are likely to come under a burden to service their existing mortgage loan. It means homeowners will have to set aside more money to repay their outstanding mortgages, especially those with SORA or SIBOR (floating) loans.
According to the MAS guidelines, you should carefully assess your ability to meet your mortgage obligations if you are currently servicing a home loan mortgage. Since further rate hikes by the US Fed are anticipated, borrowers burdened with a heavy debt load should not take on more loans.
Over the last year (since May 2022), the US Fed has raised the Fed funds rate by nearly five percentage points, hoping to curb the inflation problem without tipping into recession.
During the same period both the 1M SORA and 3M SORA has increased by approximately 3.30% but the pace of increase has started to decrease throughout Q2 2023.
Despite the banking sector turmoil (i.e. after the collapse of the Silicon Valley Bank and forced acquisition of Credit Suisse), the US Fed raised interest rates again by 25 basis points on May 3, 2023. This brought the federal funds rate to a range of 5.00% to 5.25% — the highest level since the Great Financial Crisis.
While the era of peak inflation rates is likely over, more work needs to be done for inflation to hit the US Fed’s 2% target. With the US Fed fund rate potentially at a ceiling of 5.25%-5.50%, if more rate hikes are undertaken in Q2 2023, we could see SORA rates increasing to a maximum at 3.80% – 4.00% by the end of 2023.
As mortgages in Singapore are mostly pegged to the 3-month compounded SORA, here are a few things homeowners must take into account before switching to a SORA-pegged home loan:
Amid high volatility in interest rates, there may be periods where the SORA floating rate goes up considerably. If you are a borrower, increased 3M SORA rates would mean that you will have to pay more for borrowing money to finance your property.
So, rising SORA interest rates translate into higher interest costs, thus affecting the monthly repayments.
Therefore, when choosing a 3M SORA housing loan, ensure you have access to additional cashflow, so you can pay the increased mortgage payments during months when the SORA rate displays a brief upswing.
In a fast and short interest rate cycle, there is duration risk for home loans, which makes it hard to decide how long to commit to an interest rate structure. Most borrowers worry about being trapped with a higher fixed rate home loan in a rising interest rate environment.
It is also true for a floating rate loan package, which consists of a fixed percentage (bank spread) plus the SORA rate that fluctuates over time. During such uncertain times, the shorter the lock-in, the better!
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 2007, 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 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.
Let’s understand it with an example.
|Year 1||3M SORA + 0.60%|
|Year 2||3M SORA + 0.60%|
|Year 3 onwards||3M SORA + 1.00%|
|Year 1||3M SORA + 0.60%|
|Year 2||3M SORA + 0.60%|
|Year 3||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 is better for flexibility and to maximise your interest savings without needing to explore home loan refinancing too early or frequently.
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 interest rates in the US are expected to rise further, it may be safer for homeowners to opt for a fixed-rate home loan than a floating-rate mortgage loan pegged to SORA or a board rate. However, in the current rising interest rate environment, it may be unsurprising for banks to raise their fixed rate home loan rates or offer fixed rates for a shorter period.
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 loan package before making a decision.
At Dollarback Mortgage, we are a team of highly experienced and professional mortgage consultants ready to advise you on which home loan package best suits your needs, all at no cost!
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