A Singaporean’s Guide to SOR, SIBOR, the Transition to Sora & How It Will Affect Home Loans

Suppose you ever had to take a housing loan in Singapore. In that case, 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 SOR and SIBOR will soon be phased out as the Monetary Authority of Singapore (MAS) is pushing the industry to adapt SORA as the primary interest rate benchmark.

To facilitate this transition to SORA, MAS established the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) back in August 2019.

On 31 March 2021, SC-STS published a timeline with recommendations for the industry to cease the issuance of all SOR and SIBOR linked financial products.

As a result, banks have stopped offering SOR home loans since 2017 and SIBOR home loans from end-September 2021.

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:

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.

SOR Rate

But, SOR has seen better days as it references the scandal-plagued US-dollar (USD) London Interbank Offered Rate (LIBOR) for its computation.

Not to mention that the SOR is rather volatile due to foreign exchange exposure because of the USD component.

As international regulators have announced that LIBOR will be discontinued by 30 June 2023, SOR will also be discontinued on the same day too.

As a result, banks have stopped offering SOR home loans since 2017.

If you somehow still have an outstanding SOR-based home loan, you should consider approaching your bank to change your home loan package as soon as possible.

To help retail customers make the switch, the SC-STS has advised banks to provide a SORA Conversion Package to their customers.

SORA Conversion Package

From 1 September 2021 to 31 October 2022, banks will be offering their retail customers this SORA conversion package with no additional fee or lock-in.

If you choose to take up the SORA Conversion Package, your existing SOR based loan will be converted to a comparable SORA based loan like the popular three-month Compounded SORA based loan package.

Your loan margin will also be preserved.

But, there will be a standardised Adjustment Spread (Retail) applied to your new SORA loan.

This spread reflects the average difference between SOR and 3-month SORA compounded-in advance over the last three months.

Here is how it looks like:

In addition, MAS has stated (via The Straits Times) that it:

will not require banks to re-compute the total debt servicing ratio (TDSR) for affected customers making the switch within the same bank. This is a one-time exception to facilitate the transition from SOR to SORA.  

You may also choose to switch to other loan packages offered by the banks.

But, note that this switching method is subject to the bank’s terms and conditions, which may include additional fees, lock-in period and more. You will also have to be aware of the TDSR rules if you take up this approach.

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.

SIBOR Rate

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:

1. Rates from the top 20 banks are compiled and ranked.
2. The top and bottom quartiles are removed.
3. 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, the interest rate on your loan is likely pegged to SIBOR.

But as of end September 2021, banks have stopped issuing new SIBOR home loans.

What About The Existing Home Loans Pegged To SIBOR?

If you have a home loan based on the six-month SIBOR rate that will be discontinued by 31 March 2022, you should consider approaching your bank as soon as possible to replace your six-month SIBOR home loan.

But, if you have a home loan based on the one-month or three-month SIBOR rate, there is no rush as the one, and three-month SIBOR will only be discontinued on 31 December 2024.

Your bank will be approaching you to inform you of the discontinuation in due course and offer your alternative loan packages to consider.

What is SORA (Singapore Overnight Rate Average)?

Last but not least, we have SORA.

SORA is the volume-weighted average rate of all unsecured overnight interbank SGD transactions brokered in Singapore made between Singapore banks.

SORA Rate

The interest benchmark is rather transparent as MAS has been publishing the SORA rate daily since 1 July 2005 by 9.00am on the next business day in Singapore.

Why SORA?

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 stop market fragmentation, ensure transparency, make it less complicated for consumers to compare loan prices and foster the development of deep and efficient SGD financial markets.

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 determine the SORA rate by looking at what occurred in the past.

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.

Another point to note is that, unlike SIBOR, SORA does not incorporate credit and term risk in its computation.

This means that SORA interest rates will be generally lower than SIBOR interest rates.

Should You Get a SORA-based Home Loan?

For SORA pegged loans, adoption is growing.

At the time of writing, most of Singapore’s major banks are offering their customers SORA based mortgages, with The Business Times reporting that more than $1 billion of such loans were extended as of end-2020.

On the commercial front, OCBC has led 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, the jury is still out on whether the effective cost of borrowing for SORA-based loans will be lower than SIBOR based loans.

This is due to factors like the spread respective banks charge on the interest rate for your loan.

To seek out the best loan for your needs, you should do your due diligence and compare the SIBOR and SORA floating rates, Board, Fixed Deposit or Fixed-rate loans rates.

In addition, you will also have to evaluate the whole loan package offered by the banks and see it if aligns with your personal financial goals and needs.

You can also consider approaching a trusted mortgage broker to help you with this process.

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