A Singaporean's Guide to SORA: Singapore's New Benchmark Interest Rate That Might Replace SIBOR
If you ever had to take a housing loan in Singapore, you will be familiar with the terms Singapore Dollar Swap Offer Rate (SOR); Singapore Interbank Offered Rate (SIBOR) and maybe the Singapore Overnight Rate Average (SORA).
For the longest time, SOR and SIBOR were used to price housing/mortgage loan interest rates in Singapore. But in August 2019, the Monetary Authority of Singapore (MAS) announced that SOR will be discontinued and be replaced by SORA by about end 2021, given the problems with the scandal-plagued (USD) Libor benchmark interest rate that SOR is based on.
Libor is set to be discontinued by end 2021, largely due to the Libor scandal, where it was revealed that several banks had fixed interest rates to manipulate the financial markets and line their pockets.
The SOR was impacted by this scandal as it uses the US-dollar (USD) Libor in its computation.
In addition, SIBOR may also be replaced if 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) have their way.
On 29 July 2020, these three financial industry groups released a consultation paper, proposing that SIBOR be phased out gradually over a three to four year period and replaced with SORA. The report also recommended that SORA be adopted as the main benchmark interest rate for Singapore’s financial rates.
Undoubtedly, these proposed changes will affect current and future homeowners who currently have a floating rate housing loan package from the banks or are considering one.
In the interest of your financial health, here’s what you need to know about SOR, SIBOR, the new SORA, and why it matters.
TL;DR: A Singaporean’s Guide to SOR, SIBOR and SORA
SOR, SIBOR and SORA are benchmark interest rates that banks operating in Singapore use to determine the cost of borrowing within Singapore’s financial system. In other words, banks use these benchmarks to determine how much interest to pay out to customers or charge borrowers.
Here is a quick overview of these three key benchmark interest rates:
|Singapore Dollar Swap Offer Rate (SOR)||Singapore Interbank Offered Rate (SIBOR)||Singapore Overnight Rate Average (SORA)|
|Used to Price||Commercial loans|
|Commercial & syndicated loans|
Trade & working-capital financing
|How Rate is Determined||Effective rate of borrowing SGD synthetically by borrowing USD and subsequently "swapping" to SGD by using an FX Swap||Daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks||Average rate of all unsecured overnight interbank SGD transactions brokered in Singapore|
|Methodology & Inputs||Volume-weighted average rate of USD/SGD FX swap transactions, with USD LIBOR as an input||Forward looking term rates from the top 20 banks are compiled and ranked. The top and bottom quartiles are removed. The final rate is the average of the rates offered by the 10 remaining banks||Volume-weighted average rate of transactions reported by Reporting Banks in Singapore to MAS|
|Governing Body||Association of Banks in Singapore||Monetary Authority of Singapore (MAS)|
|Loan Tenure||Overnight, 1-month, 3-month, 6-month||1-month, 3-month, 6-month, 12 month.||Overnight|
Source: Association of Banks in Singapore
Now that you are up to speed, let’s dive into what these interest rate benchmarks mean and why they matter.
What is SOR (Swap Offer Rate)?
First up we have SOR, which stands for the Singapore Dollar Swap Offer Rate.
Currently, SOR is still used to price commercial loans and derivates.
But, SOR has seen better days as it uses the scandal-plagued US-dollar (USD) Libor that is set to be discontinued by end-2021 in its computation. Not to mention that because of the USD component, the SOR is rather volatile due to foreign exchange exposure — not the best quality for a benchmark reference rate.
Thus, this benchmark is in the process of being replaced by SORA, with the transition to SORA set to complete by end 2021.
The process is already underway as after July 2017, you cannot take up any housing loans pegged to the SOR.
What is SIBOR (Singapore Interbank Offered Rate)?
Speaking of SIBOR, this benchmark interest rate is still the de facto benchmark to which home loan interest rates are pegged.
Unlike SOR, SIBOR is pegged to interbank interest rates that banks charge each other on the Singapore interbank market.
The daily SIBOR rates are calculated using a methodology developed by ABS.
Here’s how it works:
- Rates from the top 20 banks are compiled and ranked.
- The top and bottom quartiles are removed.
- The final rate is the average of the rates offered by the 10 remaining banks.
If you happen to have a floating rate housing loan, it is highly likely that the interest rate on your loan is pegged to SIBOR.
However, there is no need for you to panic, as the decision on Sibor will be made in November following the end of the consultation process by the above-mentioned industry groups.
What About The Existing Home Loans Pegged To SOR or SIBOR?
For those on SOR or SIBOR pegged loans, keep calm and carry on.
For SOR pegged loans, the transition has been rather gradual. As for SIBOR pegged loans, the proposed change to SORA is still undergoing an evaluation phase that ends in November.
You will have more than enough time as the changes will only be implemented gradually over three to four years after it is made official. This will give you ample time and the chance to refinance your loan if needed.
As of the time of writing, only the 12-month SIBOR rates will be discounted at the end of the year while the 1-month, 3-month, 6-month SIBOR rates will still continue to be published.
What is SORA (Singapore Overnight Rate Average)?
Last but not least we have SORA: the one to watch.
SORA is the volume-weighted average rate of all unsecured overnight interbank SGD transactions brokered in Singapore made between 9am and 6.15pm.
The report from the three industry groups entitled Sibor Reform and the Future Landscape of SGD Interest Rate Benchmarks has stated that the transition to SORA is a win-win for borrowers and lenders.
For borrowers, the loan market pricing will be more transparent. Whereas for lenders, SORA will help them manage risk more effectively.
Also, the report mentioned that compounded SORA rates are actually backwards-looking overnight rates. These rates are said to be generally more stable in comparison to the popular forward-looking term rates for SIBOR pegged loans. This is because forward-looking term rates have more exposure to market factors such as a quarter or year-end volatility.
Instead of replacing SIBOR with a replacement polled benchmark, the report argues that switching to SORA will be a better long term decision for Singapore’s financial markets
This is so a transition to a SORA-centred SGD interest rate market will put a stop to market fragmentation, ensure transparency, make it less complicated for consumers to compare loan prices and foster the development of a deep and efficient SGD financial markets.
Plus, MAS has also been publishing the SORA rate daily since 1 July 2005 by 9.00am on the next business day in Singapore.
SORA vs SIBOR
The main difference between SORA and SIBOR is that SORA is backwards looking as it is computed using the volume rated average of past unsecured overnight interbank transactions.
This means that there is more predictability as you can find out the SORA rate by looking at what occurred in the past.
Whereas for SIBOR, it is computed using the interest rates that banks have projected for terms in the future. This means that SIBOR rates will likely be more unpredictable and volatile, as you cannot predict the interest hikes that might happen in the future.
Can I Get A SORA-Pegged Housing Loan?
For SORA pegged loans, adoption is still in its infancy.
On the commercial front, OCBC has been leading the charge as they have made a $150 million loan pegged to SORA.
In addition, Wilmar International has also obtained a S$200 million corporate loan pegged to SORA from DBS.
But, at time of writing, there is only one SORA package on the market offered by OCBC for consumers.
If you are a homeowner looking to refinance your home loan, you may want to consider waiting a little longer for the development of SORA-pegged housing loans before making a decision.
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