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SORA Rates 2022: Should You choose SORA-pegged home loan?

sora rates
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Singapore’s banking industry has been shifting interest rate benchmarks from SOR(Swap Offer Rate) and SIBOR(Singapore Interbank Offer Rate) to SORA(Singapore Overnight Rate Average) since the end of 2021 and 2024.

Adopted by Singapore’s banks, it aims to be more reflective of the local interest rate market and transparent about the mechanism of interest rate determinations in Singapore.

Homeowners in Singapore must recalculate interest rate payments if they currently finance their homes. People planning to borrow money to buy houses from financial institutions should study the repayment options due from SORA.

What is SORA?

According to the Association of Banks in Singapore: “SORA is a volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am to 6 pm.” Banks collect their transaction data and submit it to the Monetary Authority of Singapore(MAS) for validation check and calculation. The MAS then publishes an updated SORA on the MAS’s website, and third parties at 9 am on the next business day.

SORA and Related Information Published by the Monetary Authority of Singapore

  • SORA index: A daily data series of returns earned by SORA compounded rates,
  • 1-month compounded SORA: A compounded SORA calculated for one month,
  • 3-month compounded SORA: A compounded SORA calculated for three months,
  • 6-month compounded SORA: A compounded SORA calculated for six months,
  • The aggregate volume of SORA transactions,
  • The highest transacted rate from reporting banks for SORA,
  • The lowest transacted rate from reporting banks for SORA,
  • SORA calculation methodology

Why SORA is Attractive: 7 Reasons

Contrary to SIBOR or SOR, SORA is a compounded rate calculated using data of the average interbank borrowing rates from the past rather than predicted data for SIBOR and SOR for the future. Home borrowers using the SORA loans may benefit from the following:

1. Predictability

The advantage is that borrowers can better grasp the loan rate trends than others. For sure, the past may not repeat in the future. Still, the past data information can be a good reference basis for home loan borrowers to analyze their financial circumstances instead of basing it on “future unknowns.”

2. Stability

SORA is a more stable rate than others like SIBOR or SOR. The data SORA comes from goes through the process of compounding and averaging; therefore, SORA figures are closer to the past data and become more stable.

On the contrary, SIBOR and SOR using forecasted rates for the future can deviate from the past due to economic data changes. The more the interest rate benchmarks fluctuate, the more uncertain and unpredictable the rates become. Besides, they are more subject to data manipulation and are more volatile.

3. Alignment with the International Regulations

Through the transition from SIBOR and SOR to SORA, the MAS keeps Singapore’s financial market’s interest rate products in line with the protocols and standards of the International Organization of Securities Commission.

The interest rate benchmark shifts may have a crucial impact on financial markets’ development. One prominent example is the product alteration of interest rate derivatives. The interest rate product change has affected the borrowing costs of households and individuals. 

4. Reduction of exchange rate risk

Before SORA, most banks used SOR for home financing, a rate created by swapping USD for SGD. Borrowers face an inherent exchange rate risk built in SOR. The SORA eliminates the risk and focuses on a compounded average of past transactions between banks. Home borrowers have more control over financing planning.

5. Easy comprisons

In place of SIBOR and SOR, the new interest benchmark makes it easier for clients to compare SORA loan packages offered by various banks because of its reliable source and calculation methods.

6. Transparency

Based on the past transaction data, SORA calculation and release processes are more transparent and reflect the Singapore loan market. SIBOR and SOR are forward-looking projecting rates and are more subject to manipulation and errors.

7. Lower costs

Lenders like banks can reduce risks and lower loan rates to attract clients because SORA is more predictable and reliable.

Banks in Singapore have begun offering SORA-pegged home loan packages in Singapore. Home buyers can benefit from the competitive market as banks aggressively provide new loan packages to clients. 

For example, UOB’s 2 in 1 Combo Loan Package offers clients both the fixed-rate and SORA’s rate benefits. A client has access to partly fixed-rate and partly SORA interest payments to reduce the downside risk caused by a lift in a rate.

white paper house model

How to Calculate a SORA-Pegged Home Loan Package

Below is an example of a SORA-pegged loan package:

You intend to finance a flat with an ABC bank in Singapore. The bank agrees to finance your flat with the following conditions: an SGD250,000 loan term of 25 years, a 3-month SORA compounded rate for your plan, and the bank’s spreads are 1.3% for the first year, 1.4% for the second year, and 1.5% for year three and after that. The spread is a charge initiated by a bank to cover running costs.

The Calculations

Year 1

  • 3-month compounded SORA: 1.0877%(assume no rate change)
  • ABC bank’s spread for Year 1: 1.3%
  • The total interest rate: 2.3877%=1.0877%+1.3%
  • Total interest payments for the first year: SGD5,969.25

Year 2

  • 3-month compounded SORA: 1.0877%(assume no rate change)
  • ABC bank’s spread for Year 2: 1.4%
  • The total interest rate: 2.4877%=1.0877%+1.4%
  • Total interest payments for the first year: SGD6,219.25

Year 3 & after that

  • 3-month compounded SORA: 1.0877%(assume no rate change)
  • ABC bank’s spread for Year 3: 1.5%
  • The total interest rate: 2.5877%=1.0877%+1.5%
  • Total interest payments for the first year: SGD6,469.25

The SORA and bank spread are on a yearly progressive increase for loan repayments.

What are the current SORA rates?

  • 1m compounded SORA(July 20): 1.7549%
  • 3m compounded SORA(July 20): 1.0877%
  • 6m compounded SORA(July 20): 0.6979%

SORA-Pegged Home Loans in Singapore

BanksSORA types1st Year2nd Year3rd Year & after thatLoan details
DBS3M1%1%1%
  • Lock-in period: 2 years
  • Minimum loan amount: SGD100,000
Maybank1M0.8%0.8%1.75%
  • Lock-in period: 1 year
  • Minimum loan amount: SGD300,000
  • Up to 50% repayment in the first 2 years
OCBC1M0.98%0.98%1%
  • Lock-in period: 1 year
  • Minimum loan amount: SGD300,000
  • Free change to other packages from the 2nd year onwards
  • Up to 50% repayment in the first 2 years
Standard Chartered3M1.2%1.3%1.4%
  • Lock-in period: 2 years
  • Minimum loan amount: SGD100,000
UOB3M1%1%1%
  • Lock-in: 2 years
  • Minimum loan amount: SGD100

More about Singapore Loan Rates

1. A Floating-rate home loan or a Fixed-rate one, which is better?

Home borrowers can choose various or fixed interest rate payments for their loans. You may find it overwhelming to choose a suitable package for your financial circumstances. Besides consulting the Loan Advisor for more information on the best home loan in Singapore, you should know some details below before applying for a home loan.

Most financial institutions offer lower interest rates than fixed-rate loans to appeal to customers. The interest rate gap ranges from 0,5%-1% for banks. A lower rate loan may reduce and control buyers’ expenses in the early stage of a mortgage. 

Besides, borrowers may prefer the floating-rate loan if they anticipate future loan interest will be lower. For sure, no one knows the rate direction in the future.

One advantage of fixed-rate mortgage loans is that people have more control over regular interest expenses than they choose floating property loans. But they have to pay more interest as required by the property type. One crucial thing is most fixed-rate home loans require borrowers to pay floating-rate interests from the 3rd or 4th year onwards. People like you should include the factor in calculations. Read more to find out if a fixed or floating home loan is appropriate for you.

2. The Differences Among SOR, SIBOR, and SORA

SOR(Swapped Offer Rate) is a rate financial institutions use to hedge currency exchange and interest rate risks to protect asset returns. SOR is more prone to USD dollar exchange and financial market changes beyond Singapore.

SIBOR(Singapore Interbank Offered Rate) is an average rate Singapore banks use to lend to each other in the future. Banks still use SOBOR plus a spread to lend to property loan borrowers. By 2021 and 2024, SORA will replace SOR and SIBOR as the standard in the loan market.

SORA(Singapore Overnight Average Rate) is a volume-weighted average rate regarding overnight interbank and unsecured borrowing transactions in the SGD cash market. All 24 banks in Singapore should collect and submit the information from 0800 to 1615 on the last business day to the MAS for validation checks.

The MAS calculates the volume-weight average compounded SORAs by 1-month, 3-month, and 6-month and publishes the rates and related information like the SORA index on its official website at 0900 the next business day.

3. What causes changes in SORA?

SORA, basing past eligible transactions traded and going through the process of averaging, is more reflective of the local market conditions than the other 2 rates. The economic situation dictates whether the rate rises or falls. In the booming time, SORA is more likely to rise. On the opposite, the rate declines in the recession.

The transactions of more than SGD1 million by 5 reporting banks play a critical role in SORA determining process. Finally, a reporting bank’s quality also determines its borrowing costs.

4. What are the Reporting Banks for SORA in Singapore?

The following are the participating banks reporting data to the MAS(data as of Aug 2020):

  1. ABN AMRO Bank N.V. 
  2. Australia and New Zealand Banking Group
  3. Barclays Bank PLC
  4. BNP Paribas
  5. Chang Hwa Commercial Bank Limited
  6. CIMB Bank
  7. Citibank N.A.
  8. Commerzbank AG
  9. Credit Agricole Corporate and Investment Bank
  10. DBS Bank
  11. Deutsche Bank AG
  12. HL Bank
  13. Industrial and Commercial Bank of China
  14. ING Bank N.V.
  15. KBC Bank N.V.
  16. Malayan Banking Berhad
  17. Mizuho Bank
  18. MUFG Bank
  19. National Australia Bank
  20. Natixis
  21. Overseas-Chinese Banking Corporation
  22. Standard Chartered Bank
  23. The Hongkong and Shanghai Banking Corporation
  24. United Overseas Bank

5. Is There any Alternative to the SORA and Fixed-rate Packages?

Besides offering fixed and SORA loan packages, banks also offer a hybrid loan product, a loan plan comprising SORA, and fixed-rate loan amounts with different percentages.

DBS, an example, offers 3 hybrid loans combining 50%, 40%, and 30% of fixed-rate loan amounts with 50%, 60%, and 70% of 3-month SORA loan amounts to clients. The advantage is a client can grasp the benefits of both types.

Last But Not Least

Compliant with the requirements of the International Organization of Securities Commission, SORA is a transparent and reliable interest rate benchmark making lenders more confident in controlling risks. Borrowers should SORA more predictable than the others. 

Key takeaways

  • SORA is an average rate calculated by referring to the past data of overnight interbank lending in the cash market.
  • SORA is more reliable and predictable because it is based on historical transactions.
  • Borrowers can choose floating-rate loans or hybrid property loans, including SORA.
  • The MAS releases 1M, 3M, and 6M compounded SORA every business day.

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