Making your first home purchase soon? Or thinking of refinancing your home loan? If you’ve been looking up at the various home loan packages from banks, you might have come across the acronyms SIBOR, SOR, and SORA.
But what do they stand for? And how do they affect your home loan instalments?
In the simplest sense, SIBOR, SOR, and SORA are all interest rate benchmarks that banks use to determine the interest rate they charge to borrowers.
In the case of home loans, banks charge either floating rate or fixed rate. Home loan packages with floating rate are usually pegged to SIBOR, SOR, and more recently, SORA.
With that, let’s delve deeper into what each of these interest rate benchmarks means.
What is SIBOR?
SIBOR is short for Singapore Interbank Offered Rate. Essentially, the meaning of SIBOR is that it’s the rate that banks in Singapore can borrow from each other via the interbank market.
Just like how people borrow money from each other, banks also do that when they’re short on cash. For instance, when the amount of loans they disburse is more than their short-term cash reserves, they will borrow from the interbank market.
How is SIBOR calculated?
Every working day, each of the 20 banks will submit to the Association of Banks in Singapore (ABS) the rate that they might borrow funds from the interbank market.
ABS will then remove the top and bottom quartiles (top 5 and bottom 5 rates), and get the average rate from the remaining 10. This average will be set as the SIBOR.
What does this mean for SIBOR-pegged home loans?
Given that SIBOR is derived from the average rate that banks might borrow from each other, no single bank can influence it.
Due to this nature, home loans pegged to SIBOR are considered one of the most transparent ones than other benchmarks such as board rates. While board rates are also floating rate, they’re determined by individual banks, which means the banks have sole discretion to adjust the rates.
This also makes SIBOR one of the most common benchmarks used for home loans in Singapore.
On the other hand, SIBOR-pegged home loans may be considered to be more volatile. Since it’s based on the rate that banks might borrow in the future, it’s a little more unpredictable than fixed-rate home loans.
In a way, you can never really know what’s the total interest rate that you’re paying for your home loan instalments until you’ve made the payment. So if you’re more risk-averse and want to have more certainty towards the monthly repayment each month, a fixed-rate home loan would be better.
If you’re fine with the little changes in interest rate, a floating rate home loan can be a good option. Looking at the history and trend of the SIBOR rate, it’s been on the low side. So you can benefit from the lower monthly instalments due to the lower interest rate.
However, do note that SIBOR is likely to be discontinued in the next 3 to 4 years and replaced with SORA. If you’re planning to take a floating rate home loan, be sure to consult with your bank or a loan broker to find a suitable package.
What is SOR?
Swap Offer Rate, or SOR, refers to the effective rate of borrowing SGD synthetically, through borrowing USD and converting it to SGD.
SOR-pegged home loans were an alternative to SIBOR-pegged home loans until the last of its kind was taken off the market in 2017.
Why don’t banks offer SOR-pegged home loans anymore?
Banks no longer offer SOR due to the low take-up. SOR is more volatile and makes the repayment amount increasingly uncertain for many homeowners.
In terms of the historical trend, while there isn’t much difference between SIBOR and SOR, SIBOR is generally more consistent.
On the contrary, SOR doesn’t only reflect lending rates but is also based on the exchange rate between SGD and USD, so it tends to fluctuate more than SIBOR.
It’s also computed using the USD LIBOR (London Interbank Offered Rate), which will no longer be used after 2021.
This means that for financial products priced using SOR — including derivatives, business loans, and a small number of home loans — will soon be charged based on another type of benchmark — SORA.
What is SORA?
SORA stands for Singapore Overnight Rate Average. Contrary to popular belief, it’s not a new type of interest rate benchmark and has been around since 2005.
How is SORA calculated?
SORA is derived by calculating the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank market made between 8 am and 6:15 pm of each working day.
In the simplest sense, SORA is the average rate of all interbank lending transactions.
How is SORA different from SIBOR and SOR?
Similar to SIBOR, SORA measures interbank lending rates and is not influenced by foreign exchange.
But what makes it different from SIBOR and SOR is that it’s backward-looking and calculated based on actual transactions.
So it’s deemed to provide more stability than the other 2 types of benchmarks.
On the other hand, SIBOR and SOR are both forward-looking as they’re based on projections of lending rates. Forward-looking rates are also deemed to be more susceptible to market factors on a single day’s fixing, including quarter or year-end volatility.
SORA’s stability is also one of the reasons why SIBOR and SOR will soon be replaced by it.
What does this mean for homeowners?
What this means for lenders is that SORA can help manage risks more effectively.
Since it’s based on actual interbank transactions, it provides more predictability. It gives you a better idea of how much you’ll need to pay for your home loan instalments, making it easier for you to compare and choose the right home loan package.
What if my home loan is pegged to SIBOR or SOR?
You’ll eventually need to change your home loan. If you plan to continue with a floating rate home loan, your options are SORA, board rate, and fixed-deposit home rate. The other option would be to go for a fixed-rate home loan.
As the financial industry slowly transitions from SOR and SIBOR to SORA, you can expect your bank to inform you about the change and help you transition in the near future.
If your home loan is pegged to the 12-month SIBOR, UOB had replaced it with the 3-month SIBOR in October 2020.
This is in line with the 12-month SIBOR being discontinued by end-2020 due to its lack of usage.
Here’s a breakdown on when SOR and SIBOR will be phased out:
Type of benchmark
1M SIBOR and 3M SIBOR
When is it phased out?
By end 2020
By end 2021
Possibly Q1 2022, 3 months after discontinuation of 6M SOR
By end 2024
Given that the 1-month and 3-month SIBOR are most commonly used, they’ll only be discontinued by the end of 2024. If your home loan is pegged to either of these benchmarks, there’s still some time for you to switch.
As of writing, many banks are still offering SIBOR-pegged home loans. Only a few, such as OCBC and UOB, have started offering SORA-pegged home loans.
Whether you’re a new homeowner or planning to refinance your home loan, be sure to consult with a few banks and loan brokers to enquire about the available options and get the best rates.
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