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In Singapore, properties play a significant role in our lives. About 9 in 10 resident households own the home that we live in. Not only that, mortgage loans make up more than 75% of household liabilities. This means a large proportion of the population here is going to be concerned with how interest rates impact their housing loan.
Two of the most common external interest rate benchmarks for home loans are the Swap Offered Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR). If you currently have an existing home loan, there is a good chance that your monthly mortgage repayments is based on one of these benchmarks.
However, you may not be aware that since August 2019, the Singapore Overnight Rate Average (SORA) has been the interest rate benchmark recommended by the Association of Banks in Singapore (ABS). And SORA will only become increasingly popular as the Monetary Authority of Singapore (MAS) has even set up a Steering Committee for SOR and SIBOR Transition to SORA (SC-STS) to oversee an industry-wide transition to SORA.
Announced on 31 March 2021, the SC-STS recommends that financial institutions in Singapore offer SORA-pegged housing loans instead of SOR and SIBOR for new loans and securities by end-September 2021.
Before you take up a SORA-pegged housing loan, here are 5 things that you should understand first.
#1 SORA Isn’t New
While SORA was only recommended to replace SOR and SIBOR in August 2019, it’s been around for a while. MAS has been publishing daily SORA rates since 1 July 2005.
MAS explains that SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6.15 pm each day.
Quite a mouthful. Put simply, SORA is the interest rate that banks in Singapore had lent money to each other during the day. As SORA is computed purely from actual transactions, it is more stable compared to forward-looking rates such as SIBOR or SOR.
#2 SORA Is Calculated From Actual Bank Transactions
Unlike the Singapore Interbank Offered Rate (SIBOR) and the Swap Offered Rate (SOR) that is set by either local banks or foreign banks, SORA is administered by MAS (see details below) and based on actual transacted rates that have taken place. This makes SORA more predictable compared to SIBOR or SOR.
For those who keep close tabs on daily interest rates in Singapore, you’re very likely to be able to predict SORA rates in advance. For example, the 3-month Compounded SORA rate is calculated by compounding already-published SORA rates over the past 3 months.
Note: Reporting banks in Singapore provide data on all eligible transactions traded and booked from 8 am to 6:15 pm each day. MAS then conducts thorough data validation checks and computes SORA by taking the volume-weighted average rate of all eligible transactions. SORA is then published on the MAS website the next business day at 9 am.
#3 The Predictability Of SORA (Over SIBOR & SOR) Could Benefit Homeowners More
Since SORA is more predictable, homeowners taking a SORA-pegged housing loan will have greater visibility on the interest rates that they need to pay on their home mortgage.
Besides this, SORA offers other advantages for homeowners as well.
SORA VS SOR
SORA interest rates are more stable for Singapore borrowers because there is no need to account for foreign exchange rate. This is as opposed to SOR, where rates are based on the US London Inter-bank Offered Rate (LIBOR), which means that the exchange rate between Singapore Dollar (SGD) and US Dollar (USD) will impact the SOR rates on our home loan.
Furthermore, using SOR as an interest rate benchmark may not be considered as transparent by some since SOR is based on LIBOR. There have even been incidents in the past where foreign banks were found to be colluding with one another to manipulate the LIBOR.
SORA VS SIBOR
SORA is determined by transactions that have already taken place. On the other hand, SIBOR is based on what banks in Singapore report they are willing to lend to one another – and not actual transactions. This makes SORA more transparent and also fairer – because you are paying an interest rate that is based on interbank transactions that have already taken place, rather than just what major banks in Singapore are willing to lend each other.
Another advantage of SORA is that our interest repayments tend be less sensitive to daily interest rate fluctuations.
- For SIBOR-pegged loans, if interest rate were to spike on the day that your loan is disbursed, then the interest payment for the entire period is going to be higher due to that single day spike. If you are using the 3-month SIBOR, then your rates for the next 3 months are going to be higher because of that one particular day.
- In contrast, if you are using a 3-Month Compounded SORA rate, the daily rate is always compounded over the past 3 months. So, even if interest rates were to increase on a particular day, the 3-Month Compounded SORA for that day itself will also take into account the rate movement over the past 3 months.
The end result is exactly what homeowners want: less shocks. An interest rate spike on any particular day is going to have a much smaller effect on SORA as compared to SIBOR.
Furthermore, both SIBOR and SOR will be phased out eventually, as announced by the SC-STS. For homeowners taking new housing loans or refinancing their loans, avoiding the uncertainty of an interest rate benchmark that is on the way to being phased out makes sense.
#4 SORA-pegged Home Loan Interest Rates Are Currently Attractive
Due to the low interest-rate environment, it’s no surprise that the SORA rate is currently very low. To illustrate, the 3-Month Compounded SORA as of 12 October 2021 is 0.1321% p.a.
Assuming the bank charges a spread of 1%, the all-in nett rate of the loan works out to be 1.1321% p.a.
#5 You Can Enjoy The Best Of Both Fixed And Variable Home Loans With A SORA-Pegged Home Loan Package
The UOB 3-Month Compounded SORA Home Loan Package is a SORA-pegged loan option that you can take for exposure to SORA interest rates. When SORA declines, your interest goes down. However, if SORA increases, the interest on your loan goes up accordingly.
For those who want greater certainty in your home loan package, you can also apply for the UOB 2-in-1 SORA Combo. This is a unique home loan package as it allows you to blend your home loan into two different loan packages – 1) a fixed-rate loan and 2) a SORA-pegged loan.
For example, assuming you need a $1.4 million home loan, the following is a hypothetical illustration of how the UOB 2-in-1 SORA Combo works.
Home Loan 1: $700,000 at a fixed rate of 1.35% for the first year.
Home Loan 2: $700,000 at the 3-Month Compounded SORA + 1% for the first year.
|Home Loan 1:
1.35% 2 Years Fixed Rate($700,000)
|Home Loan 2:
3-Month Compounded SORA ($700,000)
|Interest Rate||Year 1:
3M Compounded SORA + 1%
For this calculation, let’s assume the 3-Month Compounded SORA rate is at 0.13%. As such, the blended interest rates for the combo loan package is [(1.13% + 1.35%)/2] = 1.24% p.a.
If SORA goes down, homeowners still enjoy lower interest rates as a part of their home loan is pegged to the 3-month Compounded SORA. If the 3-month Compounded SORA goes up, homeowners are less affected since part of their home loan is based on the 1.35% fixed rate for the first two years.
The end result is that consumers can customise their home loan such that the interest rates they pay can be adjusted to be less sensitive to any changes in SORA. The UOB 2-in-1 SORA Combo also allows consumers to make a partial repayment on their home loan even during the 1st year, since part of the loan they take (Home Loan 2) offers flexibility to prepay even during the lock-in period.
If you are keen on such a home loan, our suggestion is to consider applying for the loan directly with UOB online so that you can enjoy any attractive online exclusive gift promotion that is offered to direct customers from time to time.
At the end of the day, SORA is simply a measurement of what current (and actually transacted) interest rates are. Depending on your views of what future interest rates will be, you can take a 1) flexible home loan package based on the SORA rate 2) a fixed home loan package or 3) a hybrid package that takes into account both SORA and fixed rates.